Diversification is available in many forms for investors

PERSONAL FINANCE

September 15, 2002|By EILEEN AMBROSE

WHEN SEEKING diversification, investors often buy a mutual fund because it can give them a stake in hundreds of companies.

Taking diversification a step further, investors might wonder if they are better off buying several funds from one fund company or spreading their money over several fund families.

The answer depends on many factors, including the fund company and its philosophy, range of investment options and one's style of investing.

Financial experts generally advise not putting all your eggs into one fund family because not every fund company excels at every type of investing style, or offers a wide enough selection.

However, there are times when sticking with a single fund company makes sense.

One reason is to avoid being deluged with statements and newsletters from multiple companies. Also, companies want business, so many offer discounts, special services or waive some fees once accounts reach a certain level.

Investors also might want to adhere to a style offered by one fund family. For instance, investors wedded to index-style investing, where a fund mimics a benchmark, might find their needs served at Vanguard Group, with 38 index funds and a reputation for low costs, experts say.

But many times a company isn't large enough to be all things to all investors, so people have to seek funds from more than one source. Among the fund companies most frequently mentioned for one-stop shopping are Vanguard, Fidelity Investments, American Funds and T. Rowe Price Associates.

"You really want to have a fund family that's good at a lot of things," said Don Cassidy, a senior research analyst at Lipper Inc.'s Denver office. "They have to be good in bonds, they have to be good in international, domestic, value and growth and all that. Not many are."

Often, a mutual fund family has an overriding philosophy, which influences how its funds invest, Cassidy said. So, even though an investor holds different funds with the same company, holdings may be similar enough that funds rise and fall together, he said. That defeats the purpose of diversification.

A good example is Janus funds, whose growth-oriented strategy in the late 1990s worked well during the bull market.

"That shop was very much large-cap growth," Cassidy said. "In hindsight, that was the kind of fund that got hit the worst" in the bear market.

Also, if you stick with one big fund family, you might miss out on a small company's fund that excels in a certain area.

"Size can hurt you," said Jordan Goodman, author of Everyone's Money Book. "A smaller fund can be more nimble when things are changing than a big fund," a useful trait when dealing with international and small-cap stocks, he said.

And lastly, investors limiting themselves to one fund company run another risk. The company might have organizational problems that lead to a high turnover among its managers and analysts, affecting many of the funds, said Scott Cooley, a senior fund analyst with Morningstar Inc. in Chicago.

For those investing in multiple fund companies, the best way to do so is through a fund supermarket offered by many investment firms and fund companies, said Nancy Bryant, a financial planner in Lutherville.

Basically, an investor opens a brokerage account that allows them to choose among thousands of funds offered by hundreds of fund companies. Even though an investor might buy six funds from six companies, she will receive one statement. "The paper nightmare is avoided," said Bryant.

Some funds are offered with "no transaction fees," which means that consumers don't pay a commission to buy the funds through the supermarket. Instead, the mutual fund company pays a distribution fee to the supermarket.

Cooley warns that before using a supermarket to make sure the funds you are interested in are sold without a transaction fee. Otherwise it might be better to buy the fund directly from the fund company.

"If you do have to pay a commission, how much is that commission going to be?" he said. "And how often do you plan to invest? If it's a one-time investment ... paying the one-time commission may not be a big deal. If you're planning to make monthly contributions to the fund, those commissions can eat you alive."

Bryant also advises that even though investors have access to thousands of funds in the supermarket, they likely need only seven to 12 stock and bond funds to be properly diversified.

To suggest a column idea, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.

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