003e Fund of Funds
Chapter 3e of 'There are no grown ups'
A ‘Fund Of Funds’ is typically an open ended investment vehicle (like a unit trust or mutual fund) that invests in other funds, rather than directly in shares, bonds, property, or other assets.
If you are the trustee of a charity, perhaps because you are part of your Parochial Church Council, you may have to make investment decisions. Even if you are tempted to run the money yourself, that is not going to happen. You will have fellow trustees, they may be very nice people, and may even be prepared to put in lots of time, but working as a committee with them, to make active management trading decisions?
Unless your charity has embraced passive (index) investment (which it probably should), there is a very persuasive sales line: ‘Just as picking a single stock requires analysis, skill, and judgement, so does picking a fund. And you don’t want to put all your eggs in one basket. So get a professional manager to choose a selection of good funds for you’. This is persuasive because it is, broadly, right. But, getting that analysis/selection via a fund of funds unlikely to work well for you.
The fund of funds may have a ‘front load’ fee on entry (so you pay its front loaded fees, and then out of the money left they invest in funds that may have their own front loaded fees, leaving various managers ‘two bites of the cherry’ to the good, and you ‘two bites of the cherry’ down)
A fund of funds will always have an annual management fee. As will the funds in which it invests. Two layers of annual management fees, and possibly even success/’overperformance’ fees, is such a burden to carry, that it is almost impossible to overcome. I will do the maths in the ‘impact of fees’ section but, for the moment, keep hold of the idea that the fees you pay in a Fund of Funds have a good chance of exceeding the return you see.
If you want advice on choosing an actively managed fund, or a selection of such funds, then pay for the time of an analyst whose opinion you value. Expect to pay them handsomely, perhaps £500-£1,000 per hour. If such an up front overhead cost is prohibitive, which is likely if investing less than six figures, it may be a useful spur to reconsider the ‘boring’ option of index tracking.
Fund of fund of funds
Do the maths! (or wait till a later post when I will do them for you). With 3 layers of fees, what will be left for the poor old investor?
When is a Fund not a Fund?
When it comes to investing in publicly quoted stocks/bonds, paying someone else to make decisions hardly makes sense when those decisions are unlikely to yield better results (and may well yield worse) than what you, or the index, would achieve without their layer of costs. For unquoted investments, the position may be more complicated. In areas such as Private Equity, Venture Capital, specialist property development, etc, a fund management boutique may be doing much more than choosing where to invest money. They may be in effect running a banking or quasi banking business, and also getting involved in the management of the businesses in which they invest. Arguably, if dealing with such funds that are quasi banks, a ‘fund of funds’ could be analogous to a specialist banking fund. But, this is probably less a ‘justification’ for investing in such funds, than an illustration of the adage that a hedge fund is ‘A charging structure with an investment strategy attached’.