FYI: Copy & Paste Barron's 2/15/17
Regards,
Ted
In 2010, Arvind Navaratnam joined Fidelity as an analyst covering life sciences, but quickly carved out a niche finding mispriced securities related to spinoffs, index changes, and other special situations. When Navaratnam pitched the idea of a fund based on this research, Fidelity agreed to test the thesis behind the scenes with $1 million in seed capital from the firm. The pilot proved successful, and in late December the Fidelity Event Driven Opportunities fund (ticker: FARNX) made its debut; it now has $28.4 million in assets.
Fund companies are constantly evaluating new-product launches—that's part of the business. But no matter how intriguing these new funds may seem, investors should be wary of committing too much (if any) money to them.
"If you believe in the concept, strategy, and the family, you might want some exposure, but this is active management that has to prove itself," says Todd Rosenbluth, director of exchange-traded and mutual fund research at S&P Capital IQ. His firm, Rosenbluth adds, reserves its highest ratings for funds and managers that have three-year track records at minimum. "If you don't have a relevant record to compare performance," he says, "you're just flying blind."
For that reason, most advisors and other professional investors steer clear of funds until they pass the three-year mark and amass a few hundred million in assets. (Barron's typically takes the same stance when recommending or profiling funds.) Given the market's recent run, even a three-year record can't demonstrate how a strategy will perform in different market and economic conditions.
That's not to say there's anything inherently wrong with new funds. Some can seemingly prove themselves in a very short amount of time, particularly if the managers are seasoned. The $259 million Oberweis International Opportunities fund (OBIOX), launched in 2007, is the brainchild of former hedge-fund analyst Ralf Scherschmidt. The premise of the fund is that investors are slow to react to improving company fundamentals. At first glance, the fund's performance is impressive, generally landing at the top of its category, and averaging a 30% annual return over the past five years. But calendar-year performance has swung from as high as 61% in 2009 to as low as a 15% loss in 2011. That's a lot of volatility for investors to stomach in a short time.
Still, with the added risk comes some potential for added return. "The flip side is you're getting a person who is very focused on doing well. This is their big opportunity," says Thomas Hanly, who, prior to starting his own firm, Two Eagle Investments, oversaw manager selection as CIO for Russell Investments. These small and nimble funds, he says, put the manager's best ideas to work. Even so, he advises allocating no more than 1% or 2% of a portfolio to a rookie manager.
THE DEVELOPMENT OF NEW funds plays a critical role in the overall health of a fund company, notes Randy Garcia, CEO of The Investment Counsel Co., a Las Vegas-based investment advisory firm. "The big firms need to empower their best people if they're going to keep them," he says. It's also to the benefit of investors, he adds, when a company has a healthy pipeline of investment ideas and skilled managers at the ready to execute them.
Most fund companies take a gradual approach to grooming new talent. Aspiring managers often start by overseeing a slice of an existing fund, go on to run a sector fund, and eventually take the reins of a diversified fund. At Janus, all 37 analysts contribute to the $4 billion Janus Research fund (JRAAX) and $2.6 billion Janus Global Research fund (JDWAX). Sector teams contribute their best ideas to both funds; portfolio weightings are tied to the index. In some cases, Janus gives promising analysts the opportunity to manage a small in-house portfolio, seeded by the firm. "We want to know what their natural style is," says Jim Goff, director of research with Janus. "This is more of a training tool."
When it comes to rolling out a new fund, the first priority is that the investment idea is sound, says Brian Hogan, president of Fidelity's equities division, noting that some ideas are incubated for years before they get a ticker. Even after the debut, managers typically work within relatively tight parameters, with chief investment officers keeping a close eye on everything from turnover to tracking error.
EVEN SO, IT'S GENERALLY best to give rookie managers time to prove themselves with someone else's money. Rookie funds, however, are another story: Barron's has made exceptions for managers with impressive track records elsewhere—such as Larry Pitkowsky and Keith Trauner, who left the Fairholme fund (FAIRX) to found GoodHaven (GOODX), and C.T. Fitzpatrick, who launched two funds, including the Vulcan Value Partners fund (VVPLX) at the end of 2009 after leaving Southeastern Asset Management, which oversees Longleaf Partners. In these cases, the managers were seasoned, the new funds adhered to their investing philosophy, and, importantly, the funds were not launched at a point in the market when that particular style was doing well.
"I'm not opposed to investing with new managers," says Garcia. "I would just want to make sure it's my high-risk capital." Then again, with so many veteran managers to choose from, you might just watch and wait.
Comments
As readers of the MFO are aware, a new mutual fund should be viewed as a unique opportunity, particularly when the manager's performance record is considered.