Multifunds pop up as often as a stock tip

Mutual funds


Investors struggling to pick from among the 8,000 stock and bond funds on the market can simplify the task by choosing a "fund of funds." These investments own shares in other mutual funds and boast several advantages: simplicity, diversification and access. Only one thing is generally missing -- good returns.

"I don't rule out the possibility that actively managed funds of funds could be a good package," said Don Phillips, president of Morningstar Inc., the fund trackers in Chicago. "I just haven't seen anyone do it right yet."

The group, still in its infancy, is poised for explosive growth, as fund companies reach out to novice investors and others just looking for simple investment choices. In the last six months, Fidelity Investments and Scudder, Stevens & Clark began selling packages of their own funds. Charles Schwab & Co. recently started three funds of funds, Growth Allocation, Balanced Allocation and One Source Portfolios International, which invest in offerings from companies such as Twentieth Century; Invesco; Janus; and Warburg, Pincus.

Over all, there were 53 funds of funds in 1996, up from 32 a year earlier and 18 in 1990, according to Morningstar. A decade ago, LTC there were only seven.

Funds of funds, also known as multifunds, are intended to offer investors one-stop shopping while giving them broad-based exposure to a variety of markets. The vast majority mix U.S stock and bond funds, although five also dabble in overseas stocks. Several own shares in intermediate-term bond funds, and one mixes various types of bond funds.

Most are actively managed, which means that they can buy shares of any mutual fund. A handful, including T. Rowe Price's Spectrum funds, Vanguard Star and the Fidelity Freedom series, own shares only in the funds of their own company. Diversification is the chief advantage: a single fund of funds can own shares in perhaps a dozen other funds. But in general, a fund of funds is a costly way to build a fund portfolio. Investors pay the management costs of whoever is sponsoring the umbrella fund, and they also pay all the expenses of the underlying funds. That double layer of expenses takes a big bite out of returns.

The API Capital Income fund and the Rightime fund levy annual expenses of more than 2 percent of assets. A trio of Markman funds levy just a hair short of 1 percent annually. Expenses for the Merriman funds range from 1.49 percent for a bond fund to 3.70 percent for an international fund. And Smith Barney charges investors 1.35 percent of assets annually on the shares sold without an upfront sales charge, in its Concert series.

While the multifunds have not been widely tested in all types of market cycles, their returns have been disappointing so far. Of multifunds that mix stocks and bonds, only four of the 14 with five-year records beat their peer groups, as defined by Morningstar, for the period ended in February.

Half of the 16 funds with three-year records gained more than their groups did, but just six of the 31 funds with one-year records were able to do so.

Funds of funds that are packages of one company's mutual funds mostly avoid these problems. But with a few exceptions, their returns are not anything to write home about, either.

Many of these funds, though, are quite new. Under a provision of the National Securities Markets Improvement Act of 1996, fund companies can escape much of the paperwork involved in creating funds of funds by limiting the underlying funds to their own products, avoiding exorbitant expenses and following certain other guidelines.

Price, Vanguard and Scudder, for example, do not add any fees to their multifunds, so investors pay only the expenses of the underlying funds. Fidelity adds a small fee, equal to one-tenth of 1 percentage point a year.

The single-company funds typically invest in relatively fixed percentages in the company's underlying funds, which also results in lower cost for the investor.

For example, Price's Spectrum Growth fund invests 5 percent to 20 percent in each of Price's Equity-Income, Growth and Income and International Stock funds; 10 percent to 25 percent in each of the company's New Era and New Horizon funds and 15 percent to 30 percent in its Growth Stock fund. It can also move up to a quarter of its assets into Price's Prime Reserve fund, a money market fund.

While its five-year record is good, Spectrum Growth trailed its peers, defined by Morningstar as large-cap stock funds that invest in a blend of growth and value issues, by more than three percentage points for the year ended in February. It has been struggling since then, which may explain a recent proxy mailed to shareholders that seeks the right to give the board of directors permission to move Spectrum Growth into other Price funds and in different proportions.

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