In 1996, there were 45 "funds of funds" on the market,
according to the Investment Company Institute, a trade
organization for the mutual fund industry. By 2005, that
number had swelled more than tenfold, to 475; and last year,
there were 865 funds of funds. Clearly, they're increasingly
finding favor with investors.
But are they for you? Well, perhaps. A review of what they
are and what they offer might shed some useful light on the
question.
What you're buying
As you may have suspected, a fund of funds is a mutual
fund that invests in other funds. In some cases, these other
funds are hedge funds, and the fund of funds can thereby make
hedge-fund investing more accessible to smaller investors.
Very often, though, a fund of fund is invested in an array of
regular mutual (or index) funds.
For example, the
Pearl Aggressive Growth (PFAGX)
fund recently had about 19% of its assets in the
Matthews Pacific Tiger (MAPTX) fund, 18% in
the
Kinetics Small Cap Opportunities (KSCYX)
fund, and 15% in the
Fidelity Leveraged Company Stock (FLVCX)
fund, among others.
Very often, though, you may not want all the component
funds, and the ones you don't want will dilute the power of
the ones you do. For example, consider the Fidelity fund in
the Pearl Aggressive Growth fund. The table below shows you
some of its recent top holdings. You can see that a stock
that makes up 3% of the Fidelity fund will make up only a
little more than half a percent of the overall fund of funds.
So your money is really being spread thin, and you may
actually end up overdiversified.
Company
CAPS
Stars(out of 5)
% of the Fidelity fund
Share of Overall Fund of Funds
Freeport McMoRan Copper &
Gold (NYSE: FCX)
****
5.74%
0.88%
El Paso (NYSE: EP)
****
3.00%
0.46%
PNC Financial (NYSE: PNC)
**
1.89%
0.29%
Tenet Healthcare (NYSE: THC)
***
1.89%
0.29%
Flextronics (Nasdaq: FLEX) Continued... |