Future performance of new funds 'set in first six months'

Investors should wait six months before buying a newly-launched fund, and then only if it has already posted strong performance, according to analysis carried out by Dennehy Weller & Co.

The research revealed a fund which performs well through the first six months if its lifetime has an 84% chance of still doing so three years down the line.

Also, fledgling funds which have not performed well in their first half-year have a tendency to continue to underperform, the report said.

About £20bn is invested in underperforming funds and 35% of these are new launches, the analysis also found.

More specifically, four out of the five US equity funds launched in the three years to 31 March 2011 have underperformed the sector, and the only fund which beat the sector average was an index tracker.

In the Absolute Return sector, £1.4bn is invested in underperforming funds, all of which were launched in the last three years.

Funds which were launched at the market bottom in March 2009 have failed to regain ground and persistently underperform, while those launched after the market bottom have done the opposite.

Brian Dennehy, managing director, said: "New fund launches often spark a public relations offensive to attract investors, the success of which can be shown by the colossal sums (over £57bn) which are invested in these fledgling funds.

"However, with over £20bn of this invested in funds underperforming their respective sector averages, pick the wrong fund and your portfolio could take a hit.

"Determining which funds will outperform their peers does not have to involve gazing into a crystal ball. If look past the glossy marketing material and analyse the statistics it seems that you can observe early indicators as to whether a fund will continue to be a success."