I love www.fundalarm.com. The witty posts and the great education and tracking of the mutual fund industry make it a must read for all investors. In this months edition they track a favorite mutual fund scam, the incubator fund, here is what Roy Wietz has to say:
"A recent press release announcing the introduction of Delaware Small Cap Core might have caused your brow to furrow: Why is the press release announcing that Small Cap Core "is now available to investors" [italics added], when the press release also indicates that the fund's "inception date" was way back in December, 1998?.....A close reading of the press release -- a really close reading -- reveals that Delaware Small Cap Core is an "incubator fund," one of the industry's most cynical, most deceptive, entirely legal, and still largely unregulated practices.
....For the first six-and-a-half years of its existence, Small Cap Core was in "limited distribution" (typically, this means that only Delaware employees and their families would have been allowed to invest in the fund).....Because Small Cap Core performed reasonably well during its "limited distribution" (i.e., incubation), Delaware allowed the fund to survive, and the fund is now smiling for the public with a fresh new face and a well-worn track record.....
If the fund hadn't performed well during its incubation period, it would have been liquidated, and virtually no one outside of Delaware would have been aware of its failure.....This kind of cherry-picking is bad enough, but Delaware Small Cap Core compounds the cynicism and deception: During most of the incubation period, the fund had a different name, different managers, a different style of investing, a more concentrated portfolio, a small and stable asset base, a lower expense ratio, and it didn't extract a 12b-1 fee.....
In other words, the current fund is essentially new, yet it's being marketed with a track record that was carefully cultivated under totally artificial conditions.....When a fund comes to market with this kind of history, we offer just two words of advice: "Avoid it".....And when a fund company engages in tactics like this, remember, that company is giving you a clear demonstration of its values, and what it thinks of its customers. "
Would you have picked this up? I doubt it (of course most advisors would have missed it also). Still, this is one good reason to have a well qualified, fiduciary advisor working for you.
Scott Dauenhauer, CFP, MSFP