Fund Spy

Which Few New Equity Funds Have Raised Serious Money?

Bridget B. Hughes, CFA

Since the beginning of 2008, more than 1,000 new funds have been launched in the United States alone. These new mutual funds range from bond funds to equity funds to alternative mutual funds, and from narrowly focused specialty funds to one-stop target-date or other asset-allocation funds.

In the past three years, bond funds have been the main recipient of investor flows due to the bear market that began in 2007. Equity funds, as a group, have generally suffered redemptions until recently.

A relatively small cache of equity funds, however, have managed to accumulate a meaningful level of assets, in excess of $1 billion each. Some of these, such as the Fidelity Series and Strategic Advisers funds, are funds of funds that are available only to a fund company's target-date or asset-allocation lineups. But some are truer success stories, at least in terms of asset gathering, are those that appealed to investors for one reason or another during or in the wake of one of the most-destructive global bear markets. Following are a few of those examples.

 American Funds International Growth and Income (IGAAX)--$5.1 billion
This fund launched at the beginning of October 2008, already in the midst of a harsh bear market and at the onset of 2008's brutal fourth quarter. It kept its loss to less than 10% in its first quarter of existence. Over its full life span, it is up more than 40% cumulatively, which puts it ahead of more than 95% of its foreign large-blend fund peers between October 2008 and June 2011. It benefited from a large cash balance at its launch and during the rest of the bear market, which officially ended in March 2009. But it also has been strong in subsequent rallies thanks to strong stock-picking.

Coming from one of the most well-regarded and largest fund families (by assets), the fund's growth isn't too surprising. That's especially true given the successful long-term track records on several of American Funds' other international mutual funds, particularly that of  American Funds Capital World Growth and Income (CWGIX), which applies a similar strategy to both U.S. and international stocks. Here, the management team shoots for a pre-expense yield of 3.5%, which the fund generates primarily by investing in dividend-paying stocks. With yields on bonds at historically low levels in many parts of the world, including the U.S., dividend payers could end up in high demand. Furthermore, many investors say mega-cap blue chips are among the world's most reasonably priced stocks.

 Dodge & Cox Global Stock (DODWX)--$2.0 billion
With the benefit of hindsight, it's clear that Dodge & Cox came to market with this fund at an unfortunate time: May 2008. Stocks had already fallen, but Dodge & Cox made things worse here by overweighting financial stocks, which suffered horribly in 2008's fourth quarter. (The fund lost 24% of its value that quarter.) Even considering the market's run-up that began in March 2009 and the fund's top-quartile 49% gain for that full calendar year, this mutual fund is still down more than 5% cumulatively since its launch. That setback places the fund at the world-stock category's bottom third since its inception. However, it has beaten its benchmark during that time.

The fund's pedigree has kept it in the fund-flow game, however. While it has suffered mild net redemptions in certain months (mostly during 2009's first half), it has more regularly taken in new cash from investors. Dodge & Cox's other funds, including  Dodge & Cox Stock  (DODGX) and  Dodge & Cox International (DODFX), boast superior long-term results (even though they were also weak in 2008); and this fund shares the same proven investment philosophy. Its management team also overlaps with the other funds'. Like its siblings, it also has a low expense ratio, giving it a leg up against the competition.

 IVA Worldwide (IVWAX)--$10.1 billion in assets--and
IVA International (IVIOX)--$2.4 billion
Launched at the beginning of October 2008, like the American fund, IVA's quick growth in assets in the past 33 months is remarkable, especially considering it arrived a year into the most recent bear market. True, IVA Worldwide (and IVA International at times) can and does hold bonds. But the fund tends to own high-yield bonds, not government issues that find homes in other world-allocation funds and that tend to provide ballast in uncertain times. From the get-go, the fund has experienced a steady stream of inflows, and new investment spiked in February 2011, when the fund said it would close its doors to new investors later that month. (The funds are still getting inflows through existing advisor relationships, though they are smaller.)

Investors here were drawn to the fund's well-known portfolio managers, Charles de Vaulx and Chuck de Lardemelle, who had previously worked for First Eagle for a number of years. De Vaulx, in particular, had an impressive long-term record on  First Eagle Global (SGENX) and  First Eagle Overseas (SGOVX), first as a comanager with Jean-Marie Eveillard and subsequently on his own. He also had built strong relationships with advisors, through which the funds are sold. Finally, the funds' value-oriented, risk-conscious approach holds particular appeal to the  many investors who have become skittish or more cautious because of the 2007-09 bear market.

Indeed, the fund's resiliency during the bear market--a huge cash hoard for a time was a boon--has kept the funds ahead of their respective packs since their inceptions. Both funds have gained more than 50% cumulatively since then. Worldwide's 57% gain is second in the category; International's 53% ranks fifth out of 62 funds that are as old.

 Northern Multi-Manager Emerging Markets Equity (NMMEX)--$2.5 billion
Although equity funds overall haven't seen much in inflows in the past several years, there have been exceptions. Since 2009, emerging-markets funds have been among the most-popular stock options. With a focus on emerging markets, this fund, launched in mid-November 2008, has thus grown, with its biggest wave of investment coming in late 2009.

Strong performance also has helped it reach its current $2.5 billion in assets. The fund is up more than 150% cumulatively since its inception. That ranks ahead of more than three fourths of its peers' results over that time.

This fund may not be as strong as its initial inflows suggest, but it does have some appeal. Northern has hired five subadvisors, each with differing but proven investment styles. This kind of style diversification has helped mitigate volatility. Most of this fund's shareholders are Northern Trust clients, but the fund is also available through Schwab and other brokerage platforms.

 PIMCO EqS Pathfinder PATHX--$1.6 billion
This fund is the newest on this list, having launched just 15 months ago. After a quick burst of investor inflows right out of the gate, the mutual fund has since seen more-modest inflows in every month, with spikes in March, April, and May of 2011. Like the funds from IVA, this mutual fund brought in two managers from another shop, Mutual Series, who carry a strong longer-term record. Furthermore, PIMCO is highly respected for its macroeconomic and bond work (more specifically, for Bill Gross); although this represents the firm's first actively managed equity fund, its managers, Anne Gudefin and Charles Lahr, say they have and will continue to take advantage of the firm's core competencies in building this portfolio.

Meanwhile, Gudefin's and Lahr's patient, risk-averse style has kept the fund from participating in the global markets' upward trend since its launch. Between mid-April 2010 and mid-July 2011, the fund's 7.6% gain is a bottom-quartile showing among world-stock funds that have been around as long. Part of the blame goes to the fund's cash stake, which has hovered around 20% of assets for much of its life. The fund has also invested more heavily than have peers in financial stocks, many of which have been weak performers.

Given Gudefin's and Lahr's previous experience, the new fund's behavior is in line with what investors should expect; their old funds tended to lag in robust rallies, but hold up better in tougher times. Over the long haul, we expect this fund to be highly competitive among world-stock funds.

Bridget B. Hughes, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.