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#1 pretty much sums it up and very close to what I wrote in my book. Half my profits in 98 and 99 came from the new fund effect in tech and small cap growth because of allotments to hot IPOs. I can think of a few new funds from Janus and INVESCO that were up 15% to 25% in a month. Even used Strong’s new high yield fund to my advantage in 96 where it beat not only all its peers but the S&P. I also exploited datelining - probably the closest thing to a free lunch you could ever find on Wall Street. I make no bones about luck being on my side in the 90s. Funny thing about luck as I have also been lucky since 2000 too, especially the luckiest trade of my lifetime - junk bonds on 12/16/2008 when the Fed rang the loudest bell I have ever heard on Wall Street. Probably explains why The Luck Factor by Max Gunther is one of top three favorite books.@junkster I was writing about funds back when those studies on new funds came out and a few things come to mind:
1. In the 1990s many new small cap and growth funds were launched that benefitted from extra IPO allocation to hot dot.com stocks like Pets.com and
Webvan. Van Wagoner , Turner Microcap Growth, Strong and Janus funds come to mind. Some of them ultimately got in trouble for juicing their new fund returns with more shares of these IPOs than other funds at the shop and not acknowledging that it was IPOs doing the heavy lifting and that once the funds grew in size the IPO effect wouldn’t last. In fact, many of those IPOs subsequently flamed out. In any case, times have changed and we no longer have a 1990s IPO market for new funds to benefit from.
2. I am fairly certain those Kobren and Charles Schwab studies did not adjust for survivorship bias. I would have to check but I did write about them back then—favorably too I believe—and I recall no mention of survivor bias. Please provide any evidence of the new fund effect that adjusts for survivor bias today if you have it. I doubt there is any evidence for it as I see bad new funds liquidated every day. In fact, their liquidations are tracked here. Nor is this to say I am against new funds. But I think newness must be accompanied with additional quantitative and qualitative research, the kind David does on this site. Fees should be part of that research in my view, and there is far more evidence of fees importance to performance than the new fund effect.
3. Think of the kind of fund this is and what it’s investing in—non-agency debt. That debt has in the past become extraordinarily illiquid during times of market stress. And funds that invested in it have been crushed due to illiquidity. I suggest MFOers look up the Regions Morgan Keegan funds if they doubt the risks of a liquidity crunch. Such a sector is not the best fit for a mutual fund that must provide daily liquidity in my view especially if the fund concentrates in that sector to a high degree over more liquid mortgage bonds. The sector meanwhile is shrinking each year.
4. At $2 billion in assets this fund collects $30 million in fees a year. At $3 billion it collects $45 million. The team required to investigate this one sector of the market must be highly compensated with that fee. Are they earning it with good Individual security selection or by concentrating in the riskiest sectors of the mortgage market more so than their lower cost peers. Regions Morgan Keegan once had a great record too before the housing bust by taking such risks.
5. In a highly illiquid sector money managers often use a pricing system called fair value for estimating securities value in the portfolio. That can make the fund seem a lot more stable than it actually is and hides risk. It also creates an incentive for fraud in how securities prices are marked.
Thanks @Old_Joe ...... :)Extensive research shows that 99.6% of the time this topic is discussed on MFO a major recession starts within 36 hours.
I cite detailed studies in my book by the Charles Schwab Center for Investment Research and also by Kobren Insight Group on the validity of the new funds effect. Also provide real time trade results on the new funds effect. Of course this was from what is now a mostly bygone era. But the effect is still there in some cases. A recent example being EIXIX - new fund in a hot sector. I would hate to think where I might be now had it not been for exploiting the new funds effect in the late 90s.
To each their own. Over two and a half years in March 2017 here at MFO I said IOFIX has been a “wonder to behold since inception”. In 50+ years in the game have never once looked at a fund’s expense ratio. Long ago in my book I wrote about exploiting the new fund effect. I used actual real money trading examples from new funds from Strong and INVESCO. I would have hated to have seen the expense ratios of these new funds.At the beginning of every mutual fund prospectus is generally a little seemingly innocuous sentence: Past performance is no guarantee of future results. So what if it's been hot in the past? The only question that matters to anyone reading this right now is--Will it continue to be? Time and again, fees or all-in costs have been the strongest most consistent indicator of future performance. Are low costs always the best predictor? No, that's why people come to this site. But Morningstar is absolutely right to ding this fund for charging a 1.5% expense ratio on $3.3 billion in assets when bond funds that specialize in non-agency debt can be had for much less.
I fail to see what relevance the last quarter inflows in 2017 has to do with now September 2019. IOFIX has trounced every bond fund in the multi sector, emerging market, high yield corporate and high yield muni, as well as the non traditional bond categories over the past three years with a 10.50% annualized return. There is no close second. I would think the dumb money is the money still waiting to initiate a position. When that occurs it may be time to run for the hills. In the meantime, its compelling story of being heavily invested in the ever shrinking legacy non agency rmbs arena continues."... It attracted more capital in last quarter of 2017 than in the first six quarters of its existence. It ended the year with $1.6B, five times the level it started the year..."
Jeepers. Is that a lotta "dumb money," then? Thanks for replying, all of you. I track IOFIX but don't own it. I own PTIAX, which is not quite the same animal, but in the same ballpark, right?
You have junk bonds at all time highs and now see where one of my favorite sentiment indicators the BofA bull/bear indicator gave a buy. The last time it went to a buy was January 3 of this year.
FWIW saying, I'm receiving noticeably more investment-signal service solicitations these days, including from services I briefly dabbled with over 10 years ago and haven't heard from in AGES. The contrarian in me takes that as a warning sign for equities.
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