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Ruling out new funds could be the wrong decision, says Lipper

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Latest research from Lipper suggests institutional investors, such as fund selectors and wealth managers, could miss out on several years of good performance if they continue to exclude new or newly-launched funds from their portfolio.

The majority of institutional investors exclude mutual funds that have not accumulated a track record of at least three years and have not achieved a certain level of assets under management.

The pan-European report tests if their track record criteria make sense from a performance and risk point of view and compares groups of newly-launched funds and funds with track records of over three years. It also looks at whether fund managers achieve better or worse results at the beginning of their fund’s lifetime.

No evidence was found that funds with long track records enjoy better performance or incur less risk than new funds. On the contrary, the empirical data suggest that newly- launched funds post higher average total returns and lower risk data.

Furthermore, it suggests that fund managers enjoy slightly better performance during the first year of their tenures.
 
Dunny Moonesawmy, co-author of the report and Lipper’s head of research for Western Europe, says: “Many institutional investors, particularly fund of funds managers, tend to adopt an analytical process that requires a three year track record to select the funds for their portfolios. Thus they discard young funds. Our analysis shows that excluding newly-launched funds or funds with short track records from their investment radar might not always be the best thing to do.”

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