Fundamental facts to stay top of the FoFs

Putting all your eggs in one basket is risky, spread the risk, and no better way than a fund of funds

Putting all your money into the shares of just one company is extremely risky. Investing it in a fund such as a unit trust reduces your exposure to the fortunes of any one company, but the ultimate in diversification has to be a fund of funds (FoFs).

Putting all your money into the shares of just one company is extremely risky. Investing it in a fund such as a unit trust reduces your exposure to the fortunes of any one company, but the ultimate in diversification has to be a fund of funds (FoFs).

FoFs are structured like any other unit trust or investment trust, but instead of holding shares or bonds directly, they hold stakes in other pooled investments. This enables investors, for the same outlay, to spread their risk across many more shares than they would be exposed to in a traditional unit trust.

Many of the major fund management groups run at least one FoFs alongside their range of directly invested unit trusts. Some FoFs invest solely in the units of other funds run by the fund management group, while others invest broadly across any unit trust on offer. Others specialise in one particular investment sector or geographical region.

Portfolio Fund Management specialises in FoFs. The group runs eight of them including two general funds and six specialist funds including some investing in UK growth, Asia, America and Japan.

Of the two general FoFs, the Portfolio FoFs is the more cautious, investing 15 per cent of its assets in bonds and cash, while the Portfolio Performance Fund is slightly more adventurous, says Tim Miller, chief executive of Portfolio.

Claire Arber of the Association of Unit Trusts and Investment Funds says FoFs are more appropriate for people with a lot of money to invest than for first-time investors. Mr Miller agrees: "The more money you have to invest, the more you want diversification," he says. First-time investors, he says, usually want a very high-risk investment.

"They can be useful for those investors looking for a once-only investment, and who want a balanced investment profile," says independent financial adviser Philippa Gee of Gee & Company in Shrewsbury. "The disadvantage is that the charges are usually much higher," she adds. If you know you are likely to add further savings to your investment in future, you are probably better off picking a different unit trust with lower charges. Then, when you come to invest again, choose unit trust with another profile which complements the first. "So you are building up your portfolio," says Ms Gee.

FoFs are usually expensive because they often have two layers of charges. First, there are the initial and annual management charges on each fund within the fund, and on top of that comes the charges levied by the FoFs manager.

But M&G's FoFs, which invests in only those funds it manages itself, get full rebates of charges from each of the funds they invest in, says Vivian Bazalgette, chief investment officer at M&G. Its FoFs simply carry a 1.5 per cent annual management charge, no front-end charge and an exit charge which reduces to nothing after five years.

Taxation is one major advantage cited by FoFs managers. Each time the fund switches investments, there is no capital gains tax to pay, whereas if an individual investor switched holdings in their own portfolio, they would be liable to the tax on any capital gains they made with the sale.

But opponents of such in-house FoFs argue the managers have their hands tied because the range of funds at their disposal is so small. Often, to get a broad enough spread of funds, they are forced to invest in even the poorer performing funds in the management group's stable.

"It may be that one provider is good in, say, fixed income but may not be good in UK equities," says Ms Gee.

But M&G argues that there are advantages to its method. "You can co-ordinate the stock selection around the world - you know the funds have the thread of the same style running through them," says Mr Bazalgette. Also, the manager knows exactly what each fund is investing in at any time, rather than having to wait for the fund's quarterly report to be published.

The manager is also likely to have more in-depth knowledge of the individual fund managers, and be aware of when they are likely to move on.

Sales of FoFs have grown, but not at the pace experienced in some other fund sectors. According to AUTIF figures, gross sales of FoFs were up around 18 per cent in 1999 from the year before.

But Philippa Gee believes they will become less relevant for investors in future. "Particularly as investors become more aware, people will not feel they need to have everything sitting in one place, so the demand [for these funds] will diminish," she says.

 

Gee & Company: 01743 236982

Portfolio Fund Management: 0171 638 0808

M&G: 01245 390390

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Marketing Manager - B2B, Corporate - City, London

    £45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Neil Pavier: Commercial Analyst

    £50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

    Loren Hughes: Financial Accountant

    £45,000 - £55,000: Loren Hughes: Are you looking for a new opportunity that wi...

    Sheridan Maine: Finance Analyst

    Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...

    Day In a Page

    General Election 2015: The masterminds behind the scenes

    The masterminds behind the election

    How do you get your party leader to embrace a message and then stick to it? By employing these people
    Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

    Machine Gun America

    The amusement park where teenagers go to shoot a huge range of automatic weapons
    The ethics of pet food: Why are we are so selective in how we show animals our love?

    The ethics of pet food

    Why are we are so selective in how we show animals our love?
    How Tansy Davies turned 9/11 into her opera 'Between Worlds'

    How a composer turned 9/11 into her opera 'Between Worlds'

    Tansy Davies makes her operatic debut with a work about the attack on the Twin Towers. Despite the topic, she says it is a life-affirming piece
    11 best bedside tables

    11 best bedside tables

    It could be the first thing you see in the morning, so make it work for you. We find night stands, tables and cabinets to wake up to
    Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police

    Steve Bunce: Inside Boxing

    Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police
    No postcode? No vote

    Floating voters

    How living on a houseboat meant I didn't officially 'exist'
    Louis Theroux's affable Englishman routine begins to wear thin

    By Reason of Insanity

    Louis Theroux's affable Englishman routine begins to wear thin
    Power dressing is back – but no shoulderpads!

    Power dressing is back

    But banish all thoughts of Eighties shoulderpads
    Spanish stone-age cave paintings 'under threat' after being re-opened to the public

    Spanish stone-age cave paintings in Altamira 'under threat'

    Caves were re-opened to the public
    'I was the bookies’ favourite to be first to leave the Cabinet'

    Vince Cable interview

    'I was the bookies’ favourite to be first to leave the Cabinet'
    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media