These New Funds May Be Diamonds in the Rough

Recently, Dodge & Cox has made two moves that have raised some eyebrows. In early February, it announced it would reopen two funds to new money, including Dodge & Cox Stock (DODGX), arguably the industry's best large-cap offering. What really caused a stir, though, was two weeks later the company quietly filed to launch a fund called Dodge & Cox Global Stock. Advisors are hoping that when this fund debuts in the spring some of the skill that made Dodge & Cox Stock such a great fund will find its way into this new offering.

This week the SmartMoney.com fund screen focuses on new funds like Dodge & Cox Global. This is the only screen we produce all year in which we dispense with much of our usual criteria. Indeed, since these funds are just getting started or are in registration they don't have the three- and five-year performance track records we prefer. We can still judge them on the fees they charge, but in this case we put more emphasis on the parent companies and the managers' reputations. We also take a long hard look at a given fund's strategy. Obviously, this means the screen is much more subjective. Morningstar says there are 1,995 funds that have been launched since Jan. 1, 2007. We found five we think are worthy of attention.

There are both pitfalls and positives to investing in a new fund. Obviously, the biggest concern is the lack of a performance track record. Most advisors won't begin to look at a fund until at least its third or fifth birthday. With good reason: You want to be able to see how a fund performs in all kinds of market conditions. By favoring a single year or a shorter time period you risk rewarding a spat of dumb luck. There are almost 17,500 funds and share classes that have track records that extend past 36 months. Surely, one of those offerings invests in the same space as any new fund about to come on the market.

You also need to be aware of why the fund is being launched. Fund companies have a knack for flooding the market with whatever type of fund happens to be hot. For example, there have been plenty of new energy and emerging-market funds launched the last few years as those two sectors posted big gains. Stay away from a fund company that's just looking to attract assets or a fund that may be investing in an industry that's near its peak. A final point: New funds can have higher fees. It's expensive to open a fund. Fees usually fall once assets come in the door. But that discount could take years to materialize. Meanwhile, you may be paying too much.

That said, there are equally compelling arguments for jumping in a new fund. The offering can be sponsored by a decent fund shop, like Dodge & Cox, that's known for being shareholder friendly and for a disciplined strategy. By getting in early you can actually benefit from the money that follows behind you. A manager can pop the stock prices of companies he's buying because he has to invest money coming in the door. Some fund shareholders will benefit from the increasing prices.

The fund may be brand new. However, the manager may have a long history. That was certainly the case with the Wintergreen fund (WGRNX) and its well-respected manager David Winters. He helped run over $35 billion as the chief investment officer at Franklin Mutual Advisers. And even though the odds are pretty much stacked against new funds, some do manage to overcome all the obstacles. The five that made our list last time returned an average 8.5% in 2007 vs. around 5% for the S&P 500. Although we must admit that performance was heavily impacted by the 26.4% return booked by American Century Legacy Multicap (ACMEX), a fund top-heavy in telecom stocks.