Poor showing of new funds shows reliance on 'hot' stocks

Like a newborn baby, the latest group of mutual funds to open this year has been welcomed into the world with a hard slap.

Many of them are suffering because they have invested heavily in technology companies, that have experienced steep drops in their stock prices. As a result, performance of the new funds has been like a whimper rather than a lusty cry.


Morningstar Inc., a Chicago company that tracks the mutual fund industry, says there are 24 funds that have started this year. Of the group, 21 have been in business more than three months and just a third of those funds made money for their investors from March 31 to June 30.

That's hardly a good start, and it demonstrates the inherent risks with new funds, which is that they are often launched into hot areas that are peaking, says Russel Kinnel, director of fund analysis at Morningstar. "The risk is not only do you come in just in time for the sell-off, but the fund gets liquidated just before the rally," Kinnel says. "You could be buying a fad and not an investment strategy."


Even the biggest and most established companies have seen their new funds debut with less than stellar performances.

Merrill Lynch Internet Strategies A returned a negative 17.67 percent from March 31 to June 30, according to Morningstar. The fund holds 66 stocks and 83 percent of them are technology companies, which include Yahoo! Inc., Inktomi Corp. and Cisco Systems Inc.

Down 15 percent

Marsico 21st Century, which has about 60 percent of the fund invested in technology, returned a negative 15.07 percent over the same time. Putnam New Century Growth, which has 62 percent salted away in tech stocks, returned a negative 13.07 percent.

The inauspicious start doesn't mean that new mutual funds should be avoided.

Investors who plunked money into the Janus Global Technology fund when it opened in January 1999 couldn't have had better timing. The fund returned 211 percent in the year and its assets surged to an astounding $8 billion. The fund has about $9.8 billion in assets, but has since cooled off from its blistering pace, returning 9.67 percent year-to-date.

GenomicsFund was hottest

The hottest new fund this year has been, which returned 39.01 percent in the March 31 to June 30 period.


It opened March 1, just as biotechnology stocks peaked and collapsed.

But it weathered the storm because it stuck to household names, such as Celera Genomics Group, Affymetrix Inc. and Human Genome Sciences Inc.

"We try to concentrate on the cream of the crop," says Steve Newby, chief investment officer of and president of Newby & Co., a brokerage in Gaithersburg. "We are not trying to find the diamond in the rough; we are trying to stick with the leaders."

Newby started the fund because a number of investors wanted to pump money into the hot genomics industry, which is racing to uncover the mysteries of the human body.

He believed that it would be less risky to pool investors' money in a mutual fund than trying to pick individual companies in a complex and volatile business.

So far, he has done well. So has Choice Balanced Fund, which was up 16.4 percent in the period, and Janus Strategic Value, which squeaked out a 3.7 percent return in a tough stock market.


James A. Hillary, portfolio manager of Marsico 21st Century, says his fund is poised to improve. It opened Feb. 1 and is up 10 percent year-to-date, Hillary says.

"Of course I would like to be up 40 percent, but these are very rocky roads in the market," he says. "We are positioning the fund very well for the future. We are investing in great companies at great prices that could have very long legs going out through 2001."

New mutual funds

Of the 24 mutual funds started this year, 21 have been in business for three months or more and their performance can be compared from March 31 to June 30.

Top Five New Mutual Funds

Fund % Return*

Advertisement 39.01

Choice Balanced 16.4

Janus Strategic Value 3.7

Stein Roe Advisor Float 2.99

IDEX Pilgrim Baxter Tech A 2.2

Bottom Five New Mutual Funds


Merrill Lynch Internet -17.67

Marsico 21st Century -15.07

Putnam New Century Growth -13.07

Baron iOpportunity -9.74

E*Trade Global Titans -5.03

Source: Morningstar Inc.


*From March 31 to June 30