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Many funds for one price
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July 13, 1999: 11:52 a.m. ET
Experts say you can diversify through a 'fund of funds,' but watch the fees
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Oakmark. Weitz. Longleaf. Some of the best-known names in mutual funds can be yours for the price of one admission at Charles Schwab.
Schwab's MarketManager Small Cap Fund allows a small investor with a limited amount of cash to get broad exposure in 25 top funds, said Cynthia Liu, senior vice president at Schwab Investment Management.
"These are for the people who don't have enough money to get into all of these funds," Liu said. "You have a segment of the investment public that is not being well served."
A "fund of funds" invests in a number of mutual funds instead of stocks to give investors instant diversification. Many of the largest fund companies such as T. Rowe Price and Vanguard Group offer "fund of funds" that invest in their own funds, while Schwab offers funds that invests in other companies' funds.
Vanguard's STAR Fund, the oldest in the category, invests 60 to 70 percent in stock funds; 20 to 30 percent of its assets in bond funds; and 10 to 20 percent in a money market fund. The holdings include nine funds, such as Vanguard's Windsor and Windsor II Funds and Vanguard GNMA Fund. The minimum investment is $1,000.
"For someone who wants diversification and one-stop shopping, this fits the bill," said Mark Balasa, a financial planner with Balasa & Hoffman in Schaumberg, Ill.
Balasa said he recommended the STAR fund for a woman who lives on the North shore of Chicago. She didn't want to do any homework, and she didn't want to pay the fees of a professional financial advisor.
His only concerns with fund of funds is that an investor's hands are tied if he disagrees with the asset allocation. Higher fees is another problem. But with the STAR fund, Vanguard waives a secondary fee, so a shareholder only pays the fees of the underlying funds.
T. Rowe Price was the second fund company to introduce fund of funds products, said Ned Notzon, managing director at the company and chairman of the Spectrum funds.
The T. Rowe Price Spectrum funds includes a growth fund, a bond fund and an international stock fund.
"The main reason we brought the funds up is we found a lot of our shareholders wanted a diversified portfolio but they didn't know how to do it," Notzon said.
T. Rowe Price has a committee of top management that meets regularly to decide whether to change the asset allocation of the funds by overweighting or underweighting a sector. For example, last year the committee decided to overweight large cap growth and underweighted large cap value. But this year, the committee has overweighted large cap value, which has made a comeback.
"In a diversified portfolio, you'll have the average or above-average performance, but you will not be in the top sector," Notzon said. "Our feeling is more people get into trouble trying to chase the top sector. This would be a terrible fund for a market timer."
Like Vanguard, T. Rowe doesn't charge shareholders a second fee for its Spectrum funds.
Schwab, however, does charge a secondary fee, said Liu. But she argued that the fee of 50 basis points a year is still less than a "wrap" brokerage account or the fees a person would pay hiring a financial adviser. Those other types of accounts also require steep minimum initial investments of $50,000 to $100,000.
The Schwab MarketManager Small Cap Fund includes Longleaf Partners Small-Cap Fund, Weitz Hickory Fund and Oakmark Small Cap I Fund.
The Schwab MarketManager Balanced Fund includes top names such as PIMCO Total Return Fund (institutional shares), Janus Twenty Fund, and the Hotchkis & Wiley International Fund. (Because Schwab already own shares of Janus Twenty, it can get into the fund, which is closed to new investors).
"Fund of funds is a low-cost way of providing investment advice," Liu said. "We look for ways to add value for investors."
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