A study supports the idea that new stock funds beat their peers in the first 12 months after they're launched. Here are three promising newcomers. By Steven Goldberg, Contributing Columnist June 16, 2008 New funds really do get out of the gate quickly. Over the past ten years, new domestic stock funds on average beat their peers by 1.1 percentage points in their first year of existence, according to a study conducted by Morningstar for Kiplinger.com.In some categories, the difference was much greater. Among small-company growth funds, new funds finished an average of 3.8 percentage points ahead of all small-company growth funds. The overall results are compelling and provide good reasons to buy new funds -- at least when you can find products that are run by well-regarded fund sponsors and managers. Advocates of new funds have long argued that fresh small-company growth funds offer the best opportunities for superior returns. That's because small-company growth stocks are particularly difficult to trade, and new funds -- with fewer dollars to invest -- are more nimble. The study looked at the returns of all 2,328 domestic stock funds launched between April 1997 and April 2007. It measured how each fund performed compared with its category in the first 12 full months after its inception. New funds tend to lose their edge after that first year, the study also found. Advertisement New funds didn't always provide predictable results. On average, young small-company value funds finished just 0.4 percentage point ahead of their peers, and, surprisingly, small-company blend funds ranked 0.6 percentage point behind the average such fund (blend funds are those that buy stocks that have attributes of both growth and value stocks). Small-company blend was the only category of the nine measured in which new funds failed to beat their older competitors. My hunch is that that result is a fluke. I think small-company blend is a good place to look for promising new funds-just behind small-company growth funds. Meanwhile, new midsize-company value funds ranked 2.2 percentage points, on average, ahead of their competitors. I wouldn't have expected midsize value funds to have such a big edge over their competitors. Value managers typically buy stocks that are out of favor and sell those that are popular. Thus, they gain less advantage from being small and nimble. New large-company funds topped their category averages by only about one-half of one percentage point. Advertisement Looked at another way, about 52% of new funds bested their average rival. Among small growth funds, 57% beat their average competitor, and among midsize-company blend funds, 55% of new funds beat their category average. Among small value funds, 54% beat their rivals. But only 45% of small blend funds finished ahead of their peers. The study didn't cover new foreign funds, but there's no reason to believe they also don't outperform their older rivals. (See the table below for more data. Why do new funds do well? For one thing, managers can buy their favorite stocks. They aren't stuck with "holds" -- stocks they think aren't good enough to buy anymore but aren't bad enough to sell yet. New funds also have fewer dollars to invest. That means that when these funds buy stocks, particularly small-company stocks, they can do so without disturbing their prices. What's more, fund companies very much want new funds to succeed. They may favor new, smaller funds by allocating them more attractive stocks. But the study found another possible explanation: momentum. New funds tended to do better than the average fund primarily when they were launched during long periods when one investment category led the market. Why? Fund companies tend to launch the most funds in investment categories that have been shooting the lights out. That's one of the ways they attract money. If their timing turns out to be right from an investment point of view -- in other words, if the existing trend continues -- those new funds perform well. What new funds look good now? Fidelity International Growth (symbol FIGFX) came into existence late last year. Fidelity hired one co-manager, George Stairs, after he spent nearly a decade running funds for Putnam. The other co-manager, Jed Weiss, had run Fidelity sector funds since 2000. Year to date through June 13, the fund lost 6.6% putting it in the top 33% of its peer group (foreign large growth). I haven't yet interviewed the managers, but Fidelity's new funds have often been winners in the past. Advertisement An even more attractive fund is month-old Dodge & Cox Global (DODWX). Managed by veterans at a superior fund company, the fund invests in companies around the world (including the U.S.) I recently wrote about the fund. The same duo who run Winslow Green Growth, one of the few "green" funds with a first-class, long-term record, manage Winslow Green Solutions (WGSLX). Launched late last year, Green Solutions buys more midsize companies than small-company specialist Green Growth. This fund is still quite risky, though, and suitable for 10% of your stock money at most. It has fallen 11.3% so far this year. HOW NEW FUNDS COMPARE WITH THEIR PEERS Category: Average +/- finish in percentage points against category % of funds that beat category after first year Large Blend 0.4454% Large Growth 0.46 48% Large Value 0.63 52% Mid Blend 1.73 55% Mid Growth 1.13 49% Mid Value 2.18 52% Small Blend -0.6045% Small Growth 3.7757% Small Value 0.43 54% Source: Morningstar Steven T. Goldberg (bio) is an investment adviser and freelance writer.