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Close, but no cigar.

Following

last Thursday's column questioning the usefulness of prelaunch subscriptions to mutual funds, readers inundated me with reasons why new funds are good: no embedded capital gains and a tendency to outperform out of the gate, to name two.

Yes, these advantages are real, but they still don't make subscription offerings worthwhile. Subscription periods are purely promotional tools used by fund companies to get you to pony up your money before the fund ever goes live.

You can just as easily reap these benefits by buying a new fund that has already opened to the public.

Let's take a closer look at some readers' comments.

No Gains, No Pain

"You didn't mention the tax advantages of a new fund," writes

David Carter

. "I went for the new

(JSVAX) - Get Janus Henderson Contrarian T Report

Janus Strategic Value fund because I thought the time for some value is right. I respect Janus, and it starts with no gains. This can be substantial after several years of double-digit growth in established funds -- well, maybe not value funds."

He's right.

A brand-spanking new fund will not be sitting on large, unrealized gains in its stocks. If these gains are ever realized, they have to be passed on to shareholders, at which point they are taxable. (See Monday's

Tax Forum for more on this issue.) In a serious downturn, a fund could be forced to sell stocks to pay off shareholders who are cashing out, which could lead to a particularly nasty tax bill.

A new fund wouldn't face that problem immediately. Positive cash flow -- something that's surely expected with a new fund -- would prevent a manager from having to sell appreciated securities (assuming he had any). Money flowing in also means that any realized capital gains would be spread out among a growing base of shareholders, diluting the tax impact.

Still, this theoretical bonus should not be a central reason for buying a new fund.

TheStreet Recommends

"I don't think the tax advantages are the reason to buy a new fund," adds Sam Beardsley, a tax specialist at

T. Rowe Price

. "You should jump into a new fund because you think it's going to go up in value."

A Performance Phenomenon

Some research suggests new funds do carry a performance edge, particularly in the first year, writes

Joe Roblee

, who says he works for a mutual fund service provider and is currently helping to coordinate a subscription period for a new mutual fund.

"Managers can start anew and apply all of their best ideas. While it would be inappropriate and illegal for mutual funds to advertise this fact, many shareholders are aware of it and are eager to get into a new fund ASAP."

Correct.

Two studies conducted in 1998, one by

Charles Schwab

and the other by

Kobren Insight

, a money management firm, concluded that new funds outperform their peers during their first two years of life. This phenomenon is particularly evident with small-cap funds.

A new fund's small size is one explanation for this amplified performance. A small fund should be more flexible, and this agility means a fund can move in and out of (particularly small) stocks easily. Plus, a fiery initial public offering will have a greater impact on a fund that has just a few million dollars in assets than it would on a billion-dollar fund.

Also, managers of new funds may be more aggressive and inclined to take on more risk in order to post the kind of performance numbers that attract assets.

But several funds that were recently launched following successful subscription periods never got the chance to be small. Janus Strategic Value,

Merrill Lynch Internet Strategies

and

(PWKAX)

PaineWebber Strategy all raised more than $1 billion before the managers ever started investing.

Janus Strategic Value, which launched at the beginning of March, has performed well anyway, returning 12.8% in the past month, almost four percentage points ahead of the

S&P 500

, according to

Morningstar

.

But the PaineWebber fund isn't faring as well. That fund, which came out last November, is up just 0.6% this year, trailing 90% of its peers.

The Merrill fund can't even claim that. It opened on March 22 and its net asset value is down 20.6% from its $10-a-share offering price.

Keep in mind you won't know what the manager will be buying when you jump into a fund before it launches. Also, the fund has no performance record. You're only buying the name of the firm and the manager.

For the Love of Janus

Investors are clearly enamored with Janus and are willing to invest in almost anything the firm offers.

"Nobody was expecting an IPO pop from the new Janus

Strategic Value fund. Believe it or not, investors are smarter than that," writes

Wayne Davis

. "They did tie themselves to the Janus name, and with good reason I would say."

Now the firm is deliberately soft-pedaling the subscription period for its next offering, the

Orion fund.

Orion will look something like the concentrated

(JAVLX)

Janus Twenty fund but will likely invest in smaller stocks. It will be run by Ron Sachs, co-manager of the

(JAENX) - Get Janus Henderson Enterprise T Report

Enterprise fund.

Like Strategic Value, this new offering will have a month-long subscription period before the fund opens June 30. However, Janus doesn't want the fund to attract too much money and it has no plans to advertise or promote the subscription period.

The firm will not be publicizing this "unofficial" subscription to its shareholders and won't use

Charles Schwab

to promote this early marketing period, as it did with Strategic Value, says spokeswoman Jane Ingalls.

Don't send your checks in now.

Since the fund is still in registration, Janus will return any checks it receives for the fund at this time, say Ingalls. It will only begin taking money on May 31. From that day until the fund opens, your money will sit in a money market account until Orion's manager can start investing it.

Mark that date.

Send your questions and comments to

deardagen@thestreet.com, and please include your full name.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.