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Revealing the real reasons new funds are not worth your investment

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Robin Powell: Hello there. When a fund management company launches a new fund, it often does so to a big fanfare. You’ll often see new funds advertised and read about them in the media. But that doesn’t mean it’s a good idea to invest in them.

Here’s Professor Raghu Rau from Cambridge Judge Business School.

Professor Raghu Rau: A lot of fund managers what they do is very straightforward: You test a number of strategies, say 15 different strategies, different ideas, everything. 14 ideas don’t work out. So, what do you do? You never launch the funds. The one idea that does work out, because you’ve done backtesting and all these things, that’s the idea that launches. You say, "Look, if we had opened this fund to you five years ago, you would’ve made 150%." Now we open it up because it’s such a good fund - and people give you money.

Of course, what they don’t tell you, is that we’ve launched 15 funds 5 years ago, 14 of them didn’t make any money so we’re not opening them up. This is the only one which did, purely by accident and here’s an opportunity for you to invest money.

Robin Powell: Sometimes fund houses close certain funds to new investors and later reopen them. Again, before they reopen them, they often invest heavily in PR and advertising. Professor Raghu Rau has conducted his own research on funds that reopen, and his advice is to stay away from them.

Professor Raghu Rau: And so, when you read about this in the newspaper, it’ll be sort of: This fund has been closed for a long time, investors have not been allowed in and now it’s reopening. So, it’s a chance to get into the fund while it’s still open. So, is that really a good thing to do? It turns out, the answer is no. The point is the fund has to choose when to reopen. If it has repeatedly bad performance, it will just choose not to reopen at all, it might choose to change something else. But, it reopens precisely because of the good performance in the last few quarters. So you look at this - "Oh, the fund is reopening, it’s done very well, time for me to get in." Unfortunately, those are right before the point when it does really badly. So, investing in funds that have reopened is a bad idea.

Robin Powell: So, beware the attraction of new funds and funds that reopen. Thank you to Professor Raghu Rau from Cambridge Judge Business School, and to you for watching. Until next time, goodbye.

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