Considering new mutual funds
Ten years ago, there were about 1000 mutual funds in Canada. Today, there are over 5000 funds. That’s about a 17.5% growth rate in the number of mutual funds. Assuming this continues, that means there could be about 25,000 mutual funds to choose from in another 10 years.
Why do new mutual funds come out?
Let’s be real honest here. Mutual Fund companies create new funds to generate more sales to create more profits and attract great market share. So obviously, there is a significant marketing motivation behind new funds. However, mutual fund companies will also argue that they create new funds because investors demand certain products. Finally, some new releases are truly innovative and then all other companies tend to jump on the marketing bandwagon. There have been endless examples like the Emerging Market Funds in 1993, Segregated funds in the mid-’90s, Technology funds in the late 1990s, Global RRSP eligible funds and now Income and Income Trust Investments.
Should investors buy new funds?
There is no perfect answer to this question because it depends on a number of different issues and more importantly how these issues affect each individual investor.
On one hand, investors might buy a new fund for some of the following reasons:
- To be first on the block. There are times where getting in early can pay off, but there is often enough uncertainty with new funds that this is more likely based on luck than skill
- NEW funds tend to be smaller. Some experts have argued that smaller funds are more nimble and can react quicker to the environment. Being able to react is a benefit only if the manager employs a more active style of management as opposed to a buy and hold style of management.
- New funds can be innovative. While this is rarely the case, innovative funds can be advantageous. Most of the time, new funds are created by fund companies because they are trendy at the time and they are just trying to keep up with the competition.
- A new fund with proven management. At times, you can get new funds but they have proven history as a result of management. Some examples of this are when Gerry Coleman left the Mackenzie IVY Funds to run the CI Harbour Funds, or when Brandes left AGF to run their own mutual funds, and when Keith Graham left Trimark to start a new AGF Mutual Fund. There will always be a debate as to whether the fund owns the track record or the manager owns the track record. Regardless, investors who like the management of a fund may want to follow that manager even though the fund may be new.
On the other side, the biggest pitfall to buying new funds is the issue of uncertainty. New funds have no track record. With no performance history, you are really buying into a concept or a story as opposed to facts. A good example of this was in the late 1990s when mutual fund companies came out with new funds that were supposed to capitalize on the demographic story of the baby boomers. The problem was that it was just a story . . . a very compelling story but in the end, just a story. This uncertainty can be very risky. I can talk about numerous examples like when Mackenzie came out with the Select Managers Funds which proved to start a trend of multi-manger funds. The idea was interesting and the story was compelling. However, sales in all of these types of funds later sizzled proving that the idea might have been more sizzle than substance.
My two cents
For the most part, an analytic like me prefer funds with a track record. Although past performance does not indicate future performance, there is a lot to learn from a fund track record such as downside risk, consistency, correlation, etc. I like funds with at least a 3-year track record but prefer funds with at least 5 years of history.
There are times when I like new funds but only if the management is proven and they have a track record from another fund. For the most part, however, history provides a means of analysis. Whatever the case, buy new funds with caution and be careful because sometimes stories don’t have substance.