Fund of Funds - Your Thoughts?
Posted on January 03, 2007 by Him and tagged investments, retirement
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.
Comments/Trackbacks
Trackback URL: http://www.makelovenotdebt.com/MT/mlnd-trackbacks.cgi/1051
The Travelin' Man | Jan 4, 2007
I have used Fidelity's target fund for 2040 retirement. It returned about 14% last year (but, I think the S&P did about 15% - and really, isn't the idea of the best funds to try to BEAT the S&P?). I think the targeted fund was an appropriate choice for me when I started because it was a dummy-proof way to be immediately diversified. Now that I have a better grasp on investing strategies, my plan is to start diverting my newest contributions to a newly devised diversified portfolio, that I have created myself. I will include both growth and value, small and large cap, and domestic and international stocks. There will be about a 10% bonnd portfolio (appropriate for my age), and the rest will be split evenly amongst the other options. It is heavy to international, but I am OK with that. Once you get a grasp on what and where you should be investing, there is no more need for targeted funds.
The Wealthy Geek | Jan 4, 2007
Travellin Man,
You are correct. The S&P including dividends was up almost 16% this year.
The problem with being so diversified is you end up replicating the markets rather than outperforming them.
Simple always does better.
The Travelin' Man | Jan 4, 2007
I agree with you, Wealthy Geek, for the most part. THIS year, I would have done better simply having my money in the S&P 500 index fund. I suspect the conventional wisdom is that MOST years, the S&P will outperform >50% of actively managed funds. Still, that is historical data, and my gut tells me that international funds are the wave of the future.
Splitting my portfolio as described above allows me to capitalize on sectors that thrive in any one given year and lessens the impact of sectors that have a miserable year (US Lg Cap Growth versus INTL Sm Cap Value in 2006, for instance). Perhaps, in the end, everything regresses to the mean (~16% for 2006?), but it will be more interesting to see how things go if the S&P has a down year or two (something that I don't think is out of the realm of possibilities).
No matter how things shake out, I feel better that I am more educated than I was on the topic and am responsible for both the marks in the win column and those in the loss column!
The Wealthy Geek | Jan 4, 2007
Travelin Man,
50% of the world's total market cap is in the U.S. But 50% is not. Putting some of your funds outside the country is bang on. Just ask Jim Rogers, George Soros's former partner at the Quantum Fund. He believes you should be up to your elbows in China.
Hey, part of investing is getting kicked in the privates and learning from it. No pain, no gain.
My only tip: turnover and taxes kill returns.
Keep the posts coming.
None of those funds are neccessarily funds of funds. Most hedge funds are individual funds and then there are funds of funds that invest in other hedge funds. The reason for investing a fund of funds is that evaluating individual hedge funds is hard for individuals and the minimum investment for the fund of funds may be a lot lower and you get diversification across hedge funds. I have shares in EBI.AX a fund of hedge funds that trades on the Australian Stock Market.
Target or lifestyle funds can also be directly invested in stocks and bonds. No reason why they need the two layers of fees.
The Wealthy Geek | Jan 3, 2007
Hi Him,
Unless I'm mistaken, you're invested in the John Hancock Lifestyle Growth Portfolio.
Can you invest in any of the regular equity funds offered by JH? The Balanced Fund is a better choice. Less funds held and lower expense ratio(2.02%).
I would think this would be much easier to manage and still very diversified.
Just a thought. Sorry if I guessed wrong.
Ps. The S&P 500 outperformed the JH Lifestyle Growth Fund in 2006 by almost a full percent.
Reply to this comment