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The fund industry bombards us weekly with newly launched funds. Is there ever a reason to invest in a rookie? As it turns out, there is.
Managers of fresh funds can invest in their most promising picks without having to contend with the baggage of existing holdings. Steve Rogé, a fund manager and financial adviser, gives this example: Suppose a fund bought a stock three years ago because the manager thought it was undervalued by 30%. The stock rose and today is only 10% undervalued. If the manager were starting from scratch, he or she probably wouldn't buy that stock now. But a manager who already owned the shares would probably hang on to them because the stock is not yet overvalued and selling would generate a taxable capital gain.
Moreover, new funds are usually small, and smaller funds are more nimble and flexible, which allows them to enter and exit positions without tipping off the market. Richard Evans, a finance professor at Boston College, compared the impact that funds with small and large asset bases have on stock prices when they trade in and out of shares. He and a couple of colleagues concluded that large funds have twice the impact -- more than 0.2 percentage point -- when they buy and sell, and the extra cost hurts their performance.
We're not saying that you should purchase just any new fund. The seven clean slates we profile here are all run by skilled managers at reputable fund companies.
A cheaper model
When does a new fund come with a track record? When it's a clone of an existing fund. Such is the case with WHG Large Cap Value (WHGLX), which is identical to Westwood Equity fund, ably run by Susan Byrne for 20 years. Over the past ten years, Westwood gained 9% annualized, beating Standard & Poor's 500-stock index by an average of nearly two percentage points per year (all performance data are to February 1). But the WHG fund comes with a significantly lower expense ratio (1% annually, compared with the older fund's 1.5%).
These days, Dallas-based Byrne says she's finding value in high-quality businesses, such as IBM and Automatic Data Processing. Their value measures are usually well above the overall market's, but that is not the case today. Further illustrating that the distinction between growth and value
has blurred, Byrne says she's seeing value in growth stocks.
Her growth favorites are those that sell their products to an expanding market. She loves United Technologies, which makes elevators, aircraft engines and commercial air-conditioning units -- products in great demand in developing countries, such as China, that are rapidly building infrastructure. In the consumer arena, she favors Colgate-Palmolive, which generates most of its revenues overseas.
Dividends from abroad
What do a Hong Kong bank, a Taiwanese chip maker, a Japanese convenience-store chain and an Australian soft-drink bottler have in common? All four -- HSBC, Taiwan Semiconductor, Lawson and Coca-Cola Amatil -- regularly boost their dividends, and all are held by Matthews Asia Pacific Equity Income (MAPIX), a new offering from a firm that specializes in Asian funds.
The principle of looking for companies that regularly increase their dividends to identify attractive stocks is no different in Asia than in the U.S. Dividend growers generally produce steadily rising cash flow and possess strong balance sheets (see The Lure of Rising Dividends). One difference, though, is that those dividends are denominated in foreign currencies. Given the limp greenback, that's not a bad thing (money in foreign currencies gets translated into more dollars when the buck weakens).
Andrew Foster, who runs the new Matthews fund, says Asian companies have been boosting the percentage of profits they pay out as dividends. "In the past, Japanese executives didn't even know their companies' payout ratio," he says. That's changed. Large, state-owned Chinese enterprises, by contrast, do have a tradition of paying dividends -- to the Beijing government. Today, these outfits are going public and paying dividends to shareholders, which led Foster to invest in Chinese dividend payers such as Huaneng Power International, a big power generator.
