• Fund of Funds – Your Thoughts?

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    Ah, the fund of funds. I was introduced to this gem of an investment when I was eligible for my SIMPLE IRA at my job.

    What is it? It is exactly what it says it is, a mutual fund that invests in…funds. (How about a Wikipedia definition? Or an Investopieda one?) Many funds that we already know and love are funds of funds. They include:

    Hedge Funds – Those get-rich-quick funds that don’t have to disclose a damn thing about what they’re invested in and only allow people with mondo cash invest in them.

    Target Funds – Those fancy investments that reallocate your holdings from more risky to less risky over time to your target retirement date.

    Lifestyle Funds – Attempt to achieve a specific asset allocation within the fund usually determined by whatever adjective describes the fund, and rebalances to remain at that allocation. Example: “Aggressive Growth” may invest in 100% stock funds, while “Balanced” may invest in a 50/50 stock/bond fund mix. Let me wax poetic about my experience with these kinds of funds.

    Currently, I am only invested in a “Growth” lifestyle fund in my SIMPLE IRA (one of the reasons why we’re tinkering with our retirement portfolio), which is invested in 80% equities and 20% fixed income. Over the past year, it has a total return of 12.57%. Not bad.

    When it comes to figuring out how this investment fits in with the rest of our retirement portfolio, I had to dig a little deeper. According to the prospectus, the fund can be invested in any number of funds that are listed in over 8 pages. How many are in my fund of funds? At the time of this writing, my glorious fund of funds is currently invested in 43 different mutual funds. They range from all asset classes, making it difficult to see what else in our portfolio may be lacking.

    Wait, 43 different funds? You know what that means?

    Oh yeah, I’m paying 43 different funds worth of expenses. Well, not really, but it is to the tune of 2.25%. Someone has to pay for all of those fund managers’ kids’ college tuitions. Not only that, but this fund is loaded! Class C shares baby, with a 1% deferred sales load if I sell before I’ve had them a year. Apparently, these funds of funds didn’t have to fully disclose all of their fees, but that should be changing. Not all funds of funds have expense ratios this high – target funds are usually on the low side.

    I know what you’re saying. “So, Him, if these loaded fund of funds suck so badly, why are you invested in it?”

    Because my SIMPLE IRA plan administrator only offers loaded funds of funds, that’s why. I’m currently plotting on how I can best change where I have my SIMPLE IRA. We’ll see how that goes.


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