- The Washington Times - Monday, July 13, 2009

Fund firms come up with new ideas all the time. But every now and again, a firm comes out with an old idea, creating a fund that overlaps its current lineup. The new fund always sounds promising, but investors should wonder whether the new issue is as good an idea for customers as it is for the managers.

The latest example is the T. Rowe Price U.S. Large-Cap Core fund, which launched last week. This is not an absolute-value fund, a leveraged fund, an issue-based on newfangled strategy, nor does it appear to be a case of a firm trying to bury bad track records in a new fund; T. Rowe has many funds in the large-cap space, typically with good records and outstanding ratings from the likes of Morningstar and Lipper. U.S. Large-Cap Core (TRULX) is not replacing any of those funds.

In a world of thousands of funds — and at a company that offers more than a hundred of them — the new fund appears to be completely dispensable and nonessential.

That said, investment firms create funds to sell them.

U.S. Large-Cap Core’s selling points are compelling. First, the fund will buy the “top picks” of the firm’s 30-plus analysts, without regard to investment style; that means the fund will try to tilt toward whichever investment style — growth or value — is in favor but will hold both types of stocks at any given time. Next, the portfolio is concentrated, at least by T. Rowe Price standards; Large-Cap Core will hold 50 to 75 stocks, about half of the number held by sister funds investing in the same space.

Typically, a “focused fund” holds no more than about 33 stocks so that each pick represents about 3 percent of the portfolio. That rewards management and investors for making fewer picks but getting them right.

And the “top picks” strategy raises questions, too. After all, if this fund has Price’s best ideas, what the heck are the firm’s other funds holding? Jeff Rottinghaus, manager of the new fund, explained that the “best ideas” concept is about the smaller number of holdings and being “unencumbered by style.”

T. Rowe Price Growth Stock (PRGFX), for example, must live by its mandate, which means investing only in growth stocks and holding over 100 of them. Likewise, T. Rowe Price Value (TRVLX) rides entirely on the value edge of the style coin.

“It’s not that those funds have something other than the top picks, it’s that they have to hold more stocks and are style specific,” Mr. Rottinghaus said. “One owns the top large-cap growth stocks and the other owns the top large-cap value stocks, but we’re just trying to buy the top large-cap stocks. Sometimes, that may mean owning more growth stocks, other times more value.”

Whether the fund can achieve that mission is something that even Mr. Rottinghaus said will take several years to prove. Outsiders suggest that investors may want to avoid the fund until such prowess is proven.

Mark Salzinger of the No-Load Fund Investor newsletter noted that T. Rowe Price previously created a global “best-ideas” large-cap stock fund, T. Rowe Price Global Stock (PRGSX), which he recommended to his subscribers and still has high hopes for. After a hot start, however, the fund’s performance has cooled, and Mr. Salzinger said a 50-50 split between two pre-existing funds would have actually outpaced Global Stock.

“Price hasn’t proven that the best-ideas approach works as well as investing in their other funds,” Mr. Salzinger said.

Industrywide, funds filled with purported “best ideas” have been a mixed bag. Performance at most shops has never shown that a portfolio of “top picks” actually outperforms the other funds from the family.

David Snowball, the Augustana College professor who writes the “new fund page” at FundAlarm.com, said that Price’s last “entirely superfluous launch” was “T. Rowe Price Overseas (TROSX), which offered no particular distinction from T. Rowe Price International, except that it wasn’t saddled with International’s embarrassing track record.” The fund, since opening at the end of 2006, has produced “distinctly mediocre results,” Mr. Snowball said.

One plus may be “new fund phenomenon” — the idea that a new fund typically starts hot because it is small and nimble — but research shows that the effect is muted in large-cap stocks. In this case, it should not inspire an investor to change from an existing holding to an unproven fund; even investors looking for a new fund may want to give Mr. Rottinghaus time to prove the concept.

“So now you can buy one [T. Rowe Price] fund and let the manager decide how much should be in value or growth at any given time for your large-cap allocation. … Sure, makes some sense,” said Gregg Brewer, executive director of research for Value Line.

“At the very least, it’s a compelling sales pitch, and they aren’t out to create a poorly performing fund. … But, in the end, the new fund comes off as just another story to use to sell a product.”

That’s the fund industry for you; and it’s why investors need to be cautious, no matter how promising any new fund appears.

• Chuck Jaffe can be reached at [email protected] or at Box 70, Cohasset, MA 02025-0070.


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