@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.
