Five New Funds to Keep an Eye On

EVERY WEEK WE come across press releases, emails and even a phone call or two alerting us to launches of new funds. With almost 22,000 funds and share classes listed in the Lipper database, you'd think we'd grow tired of all the new kids on the block. We don't, though. In fact, we keep a close eye on new funds because oftentimes these launches can point out emerging trends in the industry, round out a respected fund shop's lineup or give investors access to a new market.

Yet new funds never make our screens, for obvious reasons. They are unproven and sometimes expensive. Investors in a new fund must hope that what the fund company has sold them on paper will actually happen once there is real money on the line. In most cases, we like to see that a fund has actually lived up to its promise before giving it our stamp of approval.

That said, about twice a year we forego our usual criteria to highlight new funds. There are roughly 2,000 funds and share classes that have come out in the last 12 months. In order to pare that stack we resorted to some rather subjective judgments. Since we can't really evaluate these funds on performance, we put more emphasis on advisor interviews, a firm's reputation, the manager's track record and expenses. We also pay close attention to a new fund's given niche. If it is breaking into new territory rather than treading on familiar ground we give it extra kudos. While we wound up with a dozen or so funds on our final list, we feel the five below are especially worthy of consideration. (Exchange-traded funds will get their own list later.)

The table on the next page lists since-inception performance numbers. Screens we conduct throughout the rest of the year focus on three- and five-year performance. By combining those two time periods we weed out lucky funds that may have bubbled to the top of their respective categories because of one good year; the combo also typically tells us how a fund did during a full market cycle. All of the actively-managed funds on our list are beating certain benchmarks. But of course, such short time periods are no indication of future returns (either are longer ones). And remember that the current economic environment has been tricky for funds young and old alike.

New funds can also be more expensive than their more mature brethren. Typically, a mutual fund -- if it is run right -- will gradually lower its costs as it accumulates assets. Since it can be expensive for new funds to open their doors, especially if they aren't part of a big fund complex, expect to see expense ratios that are higher than category averages. While those fees may come down one day, there is no guarantee on when or if that will happen. Meanwhile, the new fund has an extra hurdle to jump.

Fund launches can also signal a hot trend. For example, many of the new funds launched over the last year were one-stop-shopping products for retirees, including target-date and asset-allocation funds and so-called income-replacement funds. There has been plenty of debate about just how efficient such products are for people turning 65. Global and emerging market funds have also been popular among new entries. Emerging markets, in particular, have attracted a lot of hot money over the last several years. We would shy away from any fund that seems like it's just out to attract assets for its parent.

Those are some of the drawbacks. However, there are compelling reasons to warm up to a new fund. In many cases, it can round out the lineup of a well-respected fund shop. That's the case with four of the five funds on our list. By getting in early you can beat the crowds if, indeed, the performance is good. New funds can also be a vehicle for a fund manager who has struck out on his own. David Winters helped run $35 billion at Franklin Mutual Advisers. In 2005 he launched his own fund, Wintergreen (WGRNX), and it has beaten the competition soundly since.

When we last did this screen in March, Dodge & Cox Global Stock (DODWX) had yet to formally launch. It finally did in May. While other big fund companies have been known to flood the market with new offerings, it’s rare for Dodge & Cox to unwrap a new fund. Think of this one as sitting squarely between the company's famous Stock fund (DODGX) and its International Stock (DODFX) offering. Just like those well-established funds, this one uses the stock-picking hallmarks of its parent company: strong competitive position, healthy cash flows, decent growth prospects, a cheap price tag and hold on for the long haul. The fund's holdings are spread out across the globe, with a 43% allocation to U.S. firms, according to Morningstar, 34% in the U.K. and Europe and some smaller positions in developing markets like Latin America. Top holdings include Wachovia (WB), AIG (AIG), Hewlett-Packard (HPQ), Royal Bank of Scotland (RBS) and Sony (SNE).

Earlier this summer we speculated about a small-cap turnaround. That story mentioned two new small-cap funds worth keeping an eye on: Hodges Small Cap (HDPSX) and Auer Growth (AUERX). These funds made our list. Hodges Small Cap is an offshoot of the Hodges fund, which has been a top performer during the last decade. Auer Growth, which is actually a multicap fund that gets tagged with a small-cap label, caught our attention because it has a 20-year track record of above-average performance before it opened to retail clients. The fund, though, illustrates our point about fees at new funds: It's a bit pricey at an annual expense ratio of 1.95%.

Rounding out our list are two funds on polar opposites of the mutual fund spectrum. Vanguard Total World Stock (VTWSX) is an index fund that was launched in June. It tracks a benchmark consisting of 1,737 stocks around the world, including a 45.6% weighting in the U.S., 28.8% in Europe and 11.4% in emerging markets. And it charges a low $45 annually for every $10,000 invested. That's about one-quarter the fees of actively-managed world funds, according to Vanguard. Our most aggressive fund on the list is the T. Rowe Price Africa & Middle East fund (TRAMX). This fund tracks so-called frontier markets, a development stage below emerging markets. Obviously, buying stocks in Lebanon, Kuwait, Nigeria, Egypt or Jordan -- as this fund does -- comes with a whole other set of risks that U.S. investors aren't familiar with. But T. Rowe is a shareholder-friendly firm, the fund's managers are experienced and the fees are reasonable at 1.92%. If you are planning an investment in this part of the world, a small one we hope, this is the way to do it.

The Criteria: The funds on our list were launched during the last 12 months. Unlike our usual screens, which concentrate on performance and fees, this one is more subjective. We relied on interviews we conducted over the last year, comments on industry sites like FundAlarm.com, a firm's reputation, the manager's previous track record, individual niches and expenses to ultimately make our cuts. Below are the five survivors.

Also See:
More Newcomers to Watch
Small-Cap Funds Appear Ready for Comeback
First Half of 2008 Yields Losers, a Few Winners