Winning Streaks and Mutual fund NFOs

For reasons beyond my ken, I have been asked, repeatedly, by friends and family on the wisdom of investing in one fund NFO or another. Depending on whether I know them well or not, my answer is either a snarled no, followed by a mini-lecture, or the lecture itself delivered with a "why me" expression. I'll probably print out cards pointing to this the next time to save my mouth the wear.

First, lets get the "but this fund is available at 10 bucks, while the other that you recomment costs 260" argument out of the way. Fund NFOs aren't cheap just because they are at par. Stocks might be, especially in IPOs since the market does not have a prior valuation of that offering. A fund is merely a shell over a set of assets, and the number of units and price are inversely proportional. A fund at 10 has no history of performance, while one at 260 has been around long enough to get there and its initial stakeholders have been rewarded 26-fold.

The easiest way to pick a good fund is to find the funds that have survived (first and foremost) over a decent period, then see which ones have been consistently outperforming the market, then narrow it down to those that meets your goals (assets under management, style, charter, investment rationale, etc) and pick the best amongst them.

The truth is that in a reasonable period of time (10 years?), most funds that get launched underperform the market and very few consistently outperform the index. You could say that this could be pure chance on their part, or that historical performance is no indicator of the future.

I'd say yes, that could be true. But it very well might not be.

Lets talk about winning streaks. Pick any game (Golf? Woods. Tennis? Federer) and you will find some sportsmen and some statistics that will defy probability. Dig a bit deeper and you'll find that such is not necessarily the case. In most cases these stats are generated by men and women who dominate the sport they play, and the winning percentage for them is so high that the streak itself lies well within the realms of probability.

Take cricket and 1000 runs in a season as an example - the only players who do it are exceptional batsmen. The funny part is that many of them have done it more than once. A lot of the current lot in that list are safe bets to do it again. You'd do better to bet on them than on a rookie yet to pay his first match, if both bets were offered at the same odds.

And thats all there is to it.


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