(PUB) Morningstar FundInvestor

September 2014 Vol. 23 No. 1

FundInvestor Research and recommendatio s for the s riou fund investo

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New Funds Aren’t So Special

2 . 9 average star ratings over the ensuing three- and five-year periods. So, this tells me new funds overall don’t have a big advantage, though they also don’t suffer a big disadvantage. Results are just modestly worse than for the fund world as a whole. Balanced funds produced a respectable 51% success rate, but the other groups were lousy. For the class of 2006 , the results were a bit worse. The five-year success rate for that class was 36% —a fair amount below the 41% for the fund universe. The star ratings for three and five years were 2 . 7 and 2 . 8 on average. This time, foreign-equity funds had a decent 47% success rate and taxable-bond funds produced a 53% success rate. However, if you look at the results from the three years of new funds you’ll see there’s no particular pattern to asset-class figures that would lead you to say that one is actually a good bet when it comes to new funds. For example, taxable-bond funds had a 39% success rate in the 2004 class but a 22% success rate in the 2008 class. The class of 2008 had the worst success rate of all at 35% , most likely because it’s tough to launch a fund at the start of a bear market. In this case, just 333 of the 481 funds launched in 2008 were around at the end of 2013 . Thus, a huge number of mistakes were swept under the rug. The average star ratings of survivors were a bit higher at 2 . 9 for both the three-and five-year periods. I think that’s mainly due to how many funds were killed off. Naturally, a fund that starts life with a huge loss faces long odds of ever turning a profit for the fund company, so many more underperformers were killed off from the class of 2008 than others.

RusselKinnel, Director of ManagerResearch and Editor

Fund Reports

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When a fund posts great returns its first year, we wistfully look back and wish we’d bought in. Who wouldn’t want to have owned Fairholme FAIRX in 2000 , DoubleLine Total Return Bond DBLTX in 2010 , or Vanguard Primecap VPMCX in 1985 ? New funds benefit from small asset bases and a lack of legacy positions. Some have even said they can trade ahead of a firm’s big funds, but I think that’s pretty rare in the current compliance-stringent environment. A FundInvestor subscriber recently wrote to make a similar case and request that I study the idea. I don’t often take requests, but I figured this was worthwhile even though I suspected the data wouldn’t be encouraging. To test the idea that new funds are more successful than older funds, we gathered data on funds launched in 2004 , 2006 , and 2008 . We grouped them by asset class and looked at how they fared overall. Then we looked forward over the next three and five years to see what returns, Morningstar Ratings, and success rates they generated. The success rate tells us what percentage of funds in a group survived and outper- formed over the ensuing period. Not So Much So, how’d they do? Not all that well. The class of 2004 produced a five-year success rate of 39% compared with 41% for the fund universe at large. The funds that did survive had modest 2 . 8 and

Artisan International Investor Sound Shore Investor Weitz Partners Value Investor Vanguard Windsor II Investor

Morningstar Research

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Active Versus Passive Is the Wrong Question

The Contrarian

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A Closed-Fund Watchlist

Red Flags

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Did You Notice These New Sector Bets?

Market Overview

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Leaders & Laggards

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Manager Changes and News

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Portfolio Matters

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Customize Your Income- Replacement Rate in Retirement

Tracking Morningstar

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Analyst Ratings

Income Strategist

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A High-Yield Wobble

FundInvestor 500

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FundInvestor 500 Spotlight

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Follow Russ on Twitter @RussKinnel

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