Subscriber Q&A: Funds-of-Funds

August 16, 2012

Subscriber Question:

What are fund-of-funds?

NoLoad FundX Answer:

Most mutual funds invest in an underlying portfolio of stocks or bonds, but funds-of-funds are mutual funds that invest in an underlying portfolio of other mutual funds or exchange traded funds (ETFs). (Disclosure: FundX manages a series of funds-of-funds).

According to ICI’s 2014 Fact Book, there are over 1,200 funds-of-funds on the market. Most funds-of-funds invest in funds from a single fund company.  These are called “fettered” funds-of-funds.  Class 4’s PIMCO All Asset fund (PASDX), for example, invests only in other PIMCO  funds, and Class 3’s T. Rowe Price Spectrum Growth (PRSGX) holds only other T. Rowe Price funds.  It’s less common to find a fund of funds that invests in funds from many different fund companies.

One drawback of these “fettered” funds-of-funds is that they limit their options to just one fund family – and a quick look at the NoLoad FundX ranks confirms that no one fund company consistently has funds at the top.  Funds from many different fund companies are typically among the best performers.

Unfettered funds-of-funds can go anywhere; they can invest in whichever funds or ETFs their managers deem best.  Of course, investors can avoid a management fee by selecting funds themselves, but these vehicles may be good options for investors who don’t want to manage their own fund portfolios. Investors in funds-of-funds are essentially hiring a professional to select which mutual funds and ETFs to hold in their portfolios.

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