Among the hottest topics in my mailbag for the last month have been two interesting new funds that opened last week.
Yet few people wanted to know how Janus Strategic Value or Baron iOpportunity funds will run money. Instead, their questions ran to whether the first sale of a mutual fund is like the initial public offering (IPO) of a stock, complete with the potential for shares to skyrocket on opening day.
The answer is no.
Proof started rolling in last Wednesday, when both funds started putting their money to work. Janus raised more than $1 billion for its new fund, Baron around $150 million.
While studies have shown that new funds often perform well right after opening, there is no guarantee. And no one, from the funds involved to any industry watcher, expects any new fund, no matter how sexy, to have an IPO-like “pop.”
Indeed, Janus Strategic Value was up 5 cents per share on its first day, while Baron iOpportunity was flat; both opened priced at $10 per share.
“New funds don’t have the same allure as an IPO, because they don’t take off like a stock can,” says Steve Lacey, editor of The IPO Reporter newsletter. “Your reason for buying a new fund should be that you have confidence in the manager’s ability to generate value, so you want to get in on the ground floor.”
Still, investors seem intrigued with buying a new fund on its first day, as if being first results in greater gains.
Some of that misguided sense comes from the “subscription offerings” of firms including Janus, Baron, Warbug-Pincus, Acorn, Invesco and others, which generate an IPO-like feel to a new fund.
Subscription periods generate a lot of “Gee whiz,” though they tend to be only a so-so proposition for investors.
These pre-opening periods let a fund handle heavy in-flows, meaning it won’t have to temporarily shut down if cash floods in. Closings have hurt some non-subscription openings.
Perhaps most importantly, investors get a specific, known price for their purchase, instead of getting the price of the fund, as determined by the market, on the day the money arrives. Owning the fund from its startup date makes performance easy to track; most funds quote gains not only in terms of recent years but “since inception.”
Some firms that sell loaded funds reduce or waive those upfront sales charges during subscription periods. This is the only tangible financial incentive to getting in on Day One.
Why subscription offerings may not be such a good deal is that the first investors pick up all initial trading costs. Brokerage commissions–what funds pay to buy and sell stocks–are not part of a fund’s expense ratio but are taken off the top. The pot of money raised during the subscription period cuts these costs, but they are borne entirely by the first investors.
In addition, subscription deposits sit idle or earn a money market return while waiting for the fund to open. If you want a fund because it invests in a hot market sector, letting that cash sit for a few weeks may defeat your purpose. If a fund subscription interests you, avoid the down time by waiting to invest until a few days before the fund goes live.
Remember, too, that a new fund could lose one of its big advantages if the subscription is popular. Virtually every study examining new fund performance indicates that small asset size could be the driving factor behind initial success; that edge could be negated if subscription is a big hit.
Ultimately, the pros and cons of a new fund tend to level out, so the best advice is to buy funds for which you believe the manager or the firm’s research point toward success.
Don’t just invest because the fund is new. There are plenty of proven performers out there, so new funds must inspire confidence or they aren’t worth taking a chance on.
“Special subscription periods clearly benefit the management, and shareholders don’t get so much out of it,” says Jerry Tweddell, publisher of Tweddell’s New Fund Focus newsletter.
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Charles A. Jaffe is mutual funds columnist at The Boston Globe. He can be reached at The Boston Globe, Box 2378, Boston, Mass. 02107-2378 or by e-mail at jaffe@globe.com.
