|Why pay extra fees for something
that is even more average?
What's the idea?
Funds of Funds add an extra layer of management
and (particularly) marketing costs to the already high costs of
individual funds. They purport to have two selling points:
- They provide more diversification than could
be provided by any individual fund, and
- They enable an investment manager to adjust
his asset allocation to take advantage of the relative strength
and weakness of different markets.
We would say:
- How much diversification do you want? The
pursuit of extra diversification
is usually an illusion.
- Nobody knows when particular markets are
weak or strong - they only think they do.
- The extra layer of costs averages about 0.75%.
The real value of Funds of Funds is to the industry:
- Within large fund management groups they
allow a comparatively small number of individually managed funds
to be repackaged in different ways to achieve a much larger range
- At the other extreme they allow small operators
to bundle esoteric investment vehicles to sell to a wider and
more gullible public. Funds of hedge funds, for example.
- And they have a sexy, if illusory, selling point:
wider spread = less risk.
.......so our conclusion
It is possible that somewhere out there is a gifted asset allocation
manager who can make money for his clients using the Fund of Funds
concept. But you've got no way of finding him.
Meanwhile, if you like the idea of Funds of
Funds, may we offer you Funds of Funds of Funds? Even more diversification,
even greater scope for skilled asset allocation?