New fund may look promising, but investors should be wary

New funds may be nothing more than a sales pitch

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 if the new issue is as good an idea for customers as it is for the managers.

The latest example of this is T. Rowe Price U.S. Large-Cap Core fund, which launched last week. This isn't an absolute-value fund, a leveraged fund or 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 isn't replacing any of those funds.

In a world of thousands of funds -- and at a company that operates over a hundred of them -- the new fund appears to be completely dispensable and inessential.

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 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.

"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," Rottinghaus said.

Whether the fund can achieve that mission is something that even 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, which he recommended to his subscribers and still has high hopes for. After a hot start, however, the fund's performance has cooled and Salzinger notes that 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," Salzinger said.

Charles A. Jaffe is senior columnist at MarketWatch. He can be reached at or at Box 70, Cohasset, MA 02025-0070.