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Two Young Funds Struggle to Get Noticed

Sometimes a manager's track record isn't enough to draw a crowd.

Gregg Wolper, 07/31/2012

With thousands of mutual funds already on the market, along with an ever-growing universe of exchange-traded funds and other choices, perhaps it isn't surprising that new mutual funds can find it difficult to raise assets. But in some cases, it's a bit surprising just how hard it can be. Some of the new funds being ignored might be worth keeping an eye on.

TCW International Small Cap TGICX came out in March 2011, and Seafarer Overseas Growth and Income (SFGIX) launched this past February. Both are run by managers who built impressive records elsewhere, and the TCW offering comes from an established fund company well-known to advisors.

Yet TCW International Small Company has just $28.8 million in assets, a tiny amount for a mutual fund that's been around nearly a year and a half. Even fewer investors have found their way to the Seafarer fund: It has just $5.3 million in assets. (Both figures are from the end of June.) According to the disclosure that Seafarer helpfully features prominently on its website, more than $1.1 million of the fund's $5.3 million in assets comes not from outside investors but from manager Andrew Foster and two associates. (In keeping with SEC requirements, ranges, not exact amounts, are cited.)

What's Going On? 
Both funds have significant selling points. The manager of TCW International Small Cap, Rohit Sah, built an impressive if volatile record running Oppenheimer International Small Company OSMAX for seven years. That fund was one of the top-returning foreign small-cap funds over that stretch, even though it suffered a staggering 71% loss during the bear market from late 2007 to early 2009. It gained 121% in 2009 as the appetite for smaller, riskier stocks returned, and it landed in the top quartile of the foreign small/mid-growth category every other year of his tenure.

Meanwhile, Seafarer's captain can point to a long history at Matthews, an esteemed Asian-specialist fund shop in San Francisco, which he joined in 1998. He was manager of several of that firm's Asia-focused funds, including stints as lead manager of Matthews Asian Growth & Income MACSX and comanager of Matthews Asia Dividend MAPIX and Matthews India MINDX.

Without interviewing many advisors and individual investors, it can't be known for sure why these funds have struggled to gain traction. But one can guess. Given the widespread preference for what are perceived as safer, more cautious investments in light of the continuing eurozone crisis and slowing growth around the globe, a fund that lies toward the extreme end of the aggressiveness scale, as Sah's fund does, isn't the easiest sell these days. To make matters worse, that offering suffered a big loss right out of the gate: TCW International Small Cap fell nearly 30% from the beginning of March 2011 through the end of the year, a much deeper decline than the foreign small/mid-growth average. Combine that with the fact that advisors must point to the record of a different fund to demonstrate Sah's ability, and perhaps the TCW offering's small size is no surprise after all.

Foster's fund has different issues to overcome. For one thing, while Seafarer Overseas Growth and Income focuses on emerging markets, it is not exclusively devoted to Asia as were his prior funds. More important, unlike Sah's fund, this one doesn't have the backing of an established firm with a recognizable name. Foster set up his own shop after leaving Matthews in 2011, and the Seafarer name is unfamiliar to investors. His fund tries to cushion the risks of emerging-markets investing by owning less-volatile, dividend-paying stocks and through other means, and in fact over the past three months it has suffered a much more moderate loss than the average diversified emerging-markets fund. But it can't be called a conservative offering, either.

Starting a new firm doesn't preclude the gathering of a huge asset base. A few of the most popular funds in recent years have come from new shops, such as Doubleline Total Return DBLTX and IVA Worldwide IVWIX, which each have amassed many billions of dollars. But the former focuses on bonds and the latter uses a cautious allocation strategy, and thus both are in tune with the tenor of the times.

On the Radar Screen 
It's understandable, therefore, why investors have ignored TCW International Small Cap and Seafarer Overseas Growth and Income. In addition to the issues noted above, Rohit Sah's fund includes investments in Laos, Yemen, and Mongolia. Seafarer is a small, unproven shop without a big name at its head. Such traits might intrigue and attract people when more adventurous strategies are in vogue, but a more risk-averse climate dominates now. 

At some point, though, certain investors will be looking for a bold fund to fill a small slot in their portfolio. Funds with modest asset bases have more flexibility than their more-popular rivals to own smaller, less-liquid stocks in less-traveled markets should they so choose. For that reason, it's worth keeping these offerings in mind. Their managers are accomplished, and though there are caveats with each, including their cost, they feature strategies that are not easy to find at rival choices.


Gregg Wolper is an editorial director and senior mutual-fund analyst at Morningstar.

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