Funds of funds: An old concept finds new adherents Peace of mind available instantly

Mutual funds

June 14, 1998|By Kathy Bergen | Kathy Bergen,CHICAGO TRIBUNE

In the densely populated mutual fund kingdom, products that promise something akin to instant diversification are being hawked often these days.

The products are known as "funds of funds," because they are mutual funds that invest in other mutual funds, rather than in individual stocks or bonds. The idea is to achieve instant peace of mind with one purchase -- one-stop shopping, if you will.

"They solve a lot of problems for investors who are overwhelmed with the number of choices out there today," said Robert Powell, an editor at Dalbar Inc., a Boston-based financial-services research business. "With 8,000 mutual funds, the question is not which one to pick, but which funds to pick."

The fund-of-funds concept is not a new one, of course, but it has gained momentum since 1996, when Congress eased restrictions on the investment tools.

Two years ago, 33 such funds existed; there are at least 130 now, the Investment Company Institute reports.

Assets in such funds have shot up 180 percent in two years, to $28 billion at the end of the first quarter.

The appeal of instant diversification is undeniable, but there are good reasons for caution before investing, experts say.

In many cases, performance of these funds has been lackluster, and a number charge two layers of management fees, lifting total expenses to lofty levels, noted Sheldon Jacobs, editor of the No-Load Fund Investor newsletter.

Still, with careful shopping, the funds can be an effective investment tool for many, particularly novices, those with only small amounts to invest or those without the time or inclination to handle their investments themselves.

"Funds of funds are investments that act as surrogate money managers," said Robert Markman, whose Minneapolis-based firm runs three funds of funds, the Markman MultiFunds. "They do what you would do yourself if you had the time."

In picking such a fund, an investor is really picking an entire portfolio of funds.

With Scudder Pathway Growth, for example, the type of funds you'd be getting would include large-company growth, international, high-yield bond, microcap, income, aggressive growth, emerging-markets growth, emerging markets income and money market.

"It's got a pretty broad mix, but it definitely has a growth bent to it," noted Peter Di Teresa, associate editor for Morningstar Fund Investor.

Many funds of funds have a particular orientation, such as aggressive growth, growth, balanced (equity/bond blend), international or small-cap, In picking such a fund, investors need to consider their age and risk tolerance, said Di Teresa. And, because needs change over time, investors may want to shift to a fund with a different orientation as they age.

Some funds of funds, such as the Freedom series at Fidelity Investments, automatically shift to a more conservative mix over time, he noted.

When selecting a fund of funds, investors also need to decide if they want a fund from a large mutual fund family or an independent adviser, such as Markman or Michael D. Hirsch, a pioneer in the field.

The independents tout their ability to pick from the entire entire universe of mutual funds when assembling their portfolios.

"I've yet to find one fund family that has all the answers," said Hirsch, who runs the FundManager Portfolios.

The independents' fund-picking skills come with a price. They charge management fees, often around 1 percent of assets, on top of the fees attached to the underlying mutual funds in their portfolios.

The two layers of fees often total about 2 percent, which some observers view as excessive.

For example, that is about 10 times the expense ratio for Vanguard's Total Stock Market index fund, which provides wide diversification -- more than 3,000 stocks -- in domestic equities.

As a result, a number of experts prefer funds of funds from such major companies as T. Rowe Price of Baltimore, Vanguard, Scudder and Fidelity.

Pub Date: 6/14/98

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