(PUB) Morningstar FundInvestor

New Funds Aren’t So Special Continued From Cover

2

New Funds Are Not Enough

Subsequent 5 -Yr Batting Average

Subsequent 5 -Yr Success Rate

Asset Class

# of New Distinct Funds

# of Funds With Subsequent 5 -Yr Return

Average Subsequent 5 -Yr Rank

Subsequent 5 -Yr Rating

2004 U.S. Equity

136

93

49

51.61

35.29

2.95

Sector Equity

23

18

53

33.33

26.09

3.00

International Equity

23

16

49

56.25

39.13

2.80

Balanced

75

67

42

56.72

50.67

2.90

Alternative

15

15

54

33.33

33.33

2.71

Taxable Bond

66

49

46

53.06

39.39

2.92

All Funds

6,461

4,665

46

56.61

40.88

2.91

2006 U.S. Equity

186

97

46

56.70

29.57

3.03

Sector Equity

32

26

48

50.00

40.63

2.88

International Equity

77

57

43

63.16

46.75

3.07

Balanced

117

83

47

54.22

38.46

2.55

Alternative

33

27

64

29.63

24.24

1.89

Taxable Bond

53

45

37

62.22

52.83

3.31

All Funds

6,774

4,978

46

56.89

41.81

2.89

2008 U.S. Equity

111

67

48

52.24

31.53

3.03

Sector Equity

21

16

36

75.00

57.14

3.31

International Equity

130

95

46

55.79

40.77

3.04

Balanced

137

91

52

47.25

31.39

2.59

Alternative

33

27

56

40.74

33.33

2.65

Taxable Bond

41

31

61

29.03

21.95

2.52

All Funds 2.84 Data through 2013. These tests show how funds launched in 2004, 2006, and 2008 fared. The All Funds line at the bottom of each group shows the total fund world for means of comparison. As you can see, new funds didn’t show an advantage over seasoned funds. I’ve left the muni group out of the table because there were not enough funds launched in these years for meaningful results. 6,974 5,277 48 53.80 40.71

In sum, odds are against new funds. It can seem like the opposite is true because we don’t take notice of most of the lousy new funds that start poorly and get killed off quietly. Thus, our selective memory makes them seem better than they are. Why Are They a Poor Bet? New funds tend to be lousy bets because fund com- panies make them that way. Some will try the shotgun approach in which they blast out a bunch of funds, figuring that they’ll come out ahead of the game even if only 20% hit it big and gather

enough assets to be profitable. Fund companies that take this approach are interested in quantity, not quality. Today, you see this behavior most in the exchange-traded fund and alternative funds world, where there is a land rush going on, but it still happens in open-end funds. Another reason is that fund companies tend to slap high expense ratios on new funds. The thinking is that shareholders in that fund should bear the costs of the fund’s small asset base. But of course that makes the odds of success even longer. I don’t really like the