Also known as master trusts, these are unit trusts in their own right that invest in a range of other unit trusts. Some funds are invested only in the parent company's own trusts. Others, however, including the top performer, Portfolio, invest in other companies' products.
There are now more than 60 trusts in this growing sector, although many of these are broker funds, established by financial advisers and stockbrokers for their own clients. Among the big unit trust companies which can offer funds of funds are Save & Prosper, Fidelity, Framlington, Gartmore, Invesco, Schroder, Providence Capitol and M & G.
Save & Prosper's Masterfund was one of the first to be launched, in 1985, when regulations changed to permit funds of funds to be set up.
Mike Ryder Richardson, senior marketing manager at Save & Prosper, says: 'The unit trust market is large and complex, with a large number of funds. Masterfund was set up for investors who knew that they wanted to get into unit trusts but did not know which one to go for. They wanted a managed fund where investment decisions were being taken by a professional on when to switch into or out of markets - and the appeal of the fund continues on that basis.'
When choosing a fund of funds that invests only in the parent company's products, it is important to ensure that it has a wide enough range. Save & Prosper has about 40 trusts for Masterfund's managers to choose from.
Mr Ryder Richardson says that the performance of the fund, which is now worth pounds 55m, has been good and that it has consistently been in the top quartile of the sector. The value of an investment in the fund has risen by 55 per cent over the past five years with income reinvested - thus easily satisfying its aim of beating the returns from an equivalent investment in a building society.
A pounds 1,000 lump sum, invested at the launch of the fund in November 1985, was worth pounds 2,634 at 1 September this year, compared with pounds 1,765 if it had been invested in a building society. Contributions of pounds 50 per month totalling pounds 5,250 over the same period would be worth pounds 8,602, compared with pounds 6,935 which had been entrusted to a building society.
Masterfund typically invests in 10-12 of Save & Prosper's funds, representing about 800 stocks with a broad spread at any one time. Investment decisions tend to be conservative. At present the fund is 31 per cent in Japan and 2.3 per cent in the United States.
Save & Prosper's minimum lump sum investment is usually pounds 1,000, but it is prepared to accept only pounds 500 for the Masterfund, an indication of its commitment to small investors. The company also runs a savings scheme which accepts a minimum of pounds 35, and the fund is fully 'Peppable'.
Mr Ryder Richardson points out that while some managers of composite funds may impose charges in relation to both the parent fund and the funds it is investing in, Masterfund, in common with other unit trust funds of funds, does not. It makes a 5.5 per cent initial charge, which is just above the sector average, and then 1 per cent annually after that. Higher charges are usually justified by the increased spread of risk, although some funds of funds are charging annual fees of as much as 2.75 per cent.
Other funds that can be 'pepped' include Abbey Managed Income, Axa Equity & Law Balanced Trust, Laurentian Managed, Lloyds Bank Master Trust, M & G, Managed Income, Portfolio Fund of Funds and TSB's Selector and Selector Income funds.
Investors who might be looking for a broad-based portfolio with a small initial stake should also give consideration to investment trust funds.
These unit trusts are designed for investors who want to take advantage of investment trust discounts on certain types of investment trust shares. Investment trusts themselves invest in a spread of companies, some focusing on British companies, others investing overseas.