Funds of Funds

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%. Do Costs Matter?

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 of products.
• 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 is.....

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?