Mutual Fund "Incubators"

Fox in the Henhouse

"Incubators" are the laboratories (actually, filing cabinets) in which mutual fund families do things they don't want the public to know about - at least not until the time is ripe. More specifically, they use the "incubation process" to: (a) seed a number of new mutual funds, (b) nurture them in a variety of creative ways, and then (c) market to the public only those funds whose early results make them readily marketable. Of course, the sponsors in question deny emphatically that the process just described is driven solely by crass marketing considerations. They claim that the process is driven primarily by an honest desire to avoid foisting untested investment approaches (or money managers) on an unsuspecting public.

It's a Free Market

No one can legitimately question a fund family's decision not to spend large sums promoting a product with a poor track record. But to deny that the incubation game isn't geared to achievement of precisely its apparent aim � to exploit the law of averages by placing bets on numerous horses on the track � strains credulity. The number of funds moving through the incubation pipeline tends to accelerate dramatically during hot IPO markets, when large fund families can use their commission dollars to snag "hot" offerings, an undue portion of which gets dropped into the mouths of incubating funds. If the offerings perform well, the baby funds get nurtured further; if not, they undergo the mutual fund equivalent of being orphaned � no advertising, no promotion and, in many cases, no eventual offering to outside investors.