Mutual Funds/Mutual Fund Advice

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Question
QUESTION: Hello:

Do mutual funds that invest in other mutual funds, fund of funds, historically perform better or worse than mutual funds that invest in individual securities?

I thank you for your reply

ANSWER: Hi Kenneth,

I don't have a database that I can use to do a study but I would say that fund of funds historically would have under performed funds that invest in individual securities.  The reason would be the expense ratio.  Fund of funds are more expensive than traditional mutual funds. Expenses are a well documented detractor from the returns of mutual funds.

I hope this helps.

Best,

Michael

Owner
Michael Weiss, CFA
http://www.series7examtutor.com
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---------- FOLLOW-UP ----------

QUESTION: Hello:

Why to you indicate that fund of funds mutual funds are more expensive?

I spoke with a representative at a mutual fund company that offers some of these funds, and she indicated to me that the fund I was interested in has an expense ratio of 0.70%.  I think anything with an expense ratio of more than 1% is considered expensive.
She indicated to me that investors do not pay an expense ratio for all of the funds inside of the one fund.  Sure, there are funds with smaller expense ratios, but they may not be suitable to all investors.

I thank you for your follow-up reply.

Answer
I say they are more expensive because that is generally true.  The exception might be a fund of funds at Vanguard.  A fund of funds with an expense ratio of 0.70% would be very low compare to other fund of funds.  The representative is wrong about the expenses of the underlying funds. Please see the following explanation from Investopedia:

http://www.investopedia.com/terms/f/fundsoffunds.asp#axzz2FA6tregP

I hope this helps.

Best,

Michael

Owner
Michael Weiss, CFA
http://www.series7examtutor.com
http://www.series6examtutor.com
http://www.series65examtutor.com  

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Michael Weiss, CFA

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I can answer most questions about mutual funds.

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I am the owner of Series 7 Exam Tutor , a financial tutoring business that provides personalized tutoring for the Series 7 Exam, the Series 6 Exam ,the Series 65 Exam, the Series 66 Exam, the Series 63 Exam and the Series 24 Exam . I also offer tutoring for finance courses. For additional information, please visit, Finance Exam Tutor. Prior to launching Series 7 Exam Tutor, I worked in investments for 20 years with the majority of this time focused on investment analysis and portfolio management. I have worked for large companies such as Merrill Lynch and Evergreen Investments and have also worked for smaller firms as well. Throughout my career, I have sought to mentor younger colleagues whenever possible, especially those enrolled in the CFA program. I completed the CFA program in 2002 after passing all three exams on the first try. I also passed the Series 7 Exam with a score of 94%. For additional information about me, you can visit the links below:
http://www.series7examtutor.com
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CFA Institute and CFA Society of Philadelphia

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Education/Credentials
M.B.A. in Finance & Investments from the Zicklin School of Business at Baruch College and a B.A. in Finance & Economics from the City University of New York - Baccalaureate Program.

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