Are you a fan of meal deals, breakfast cereal variety packs, and barely twitching a muscle when it comes to investing?

Then index tracker fund-of-funds are probably for you.

A good fund-of-funds1 is a passive investor’s Swiss army knife. Open it up and you’ll find several index trackers inside, offering you exposure to a variety of assets – invariably global bonds and equities but also in some cases property, cash, and more.

A fund-of-funds stack

The joy of fund-of-funds is that they are as simple as a Wurzel and relieve investors of chores like:

It’s hard to make investing any more automated then a fund-of-funds, but there is one complexity left – the proliferation of competing all-in-one products.

Happily, Monevator is here to streamline even that choice. You’ll be back to eating grapes in no time!

We’ve previously considered the market-leading Vanguard LifeStrategy funds and HSBC’s World Index Portfolios.

Since then the field has widened to include:

The first three products offer much the same thing – a family of funds that line up according to how risky they are. The risk factor (as measured by volatility) escalates as you go up the range.

At the low end, Architas MA Passive Prudent, L&G Multi-Index 3 and BlackRock Consensus 35 heavily tilt towards bonds and cash – generally well over 60% of their allocation is in low risk assets.

Whereas Architas MA Passive Dynamic, L&G Multi-Index 7 and BlackRock Consensus 100 sit over 90% in equities.

Each family is rounded out with some more balanced funds in the middle. The idea is to pick your personal Goldilocks fund – one which is neither too risky nor too safe.

Family problems

Like a bunch of in-breds, however, all three of these families suffer from the same related problem… they don’t provide a clear enough view of your asset allocation over time.

Your critical decision is equities versus fixed income (i.e. bonds and cash).

Will you be 80:20 or 60:40 or what? You need to know to properly draw up your investment plans.

But L&G, BlackRock, and Architas all reserve the right to roam. For example, BlackRock Consensus 60 can range anywhere from 20% to 60% in equities and Architas doesn’t even define its boundaries. It makes long-term planning hard and subject to the whims of someone else.

Instead of well-defined rules, the fund literature runneth over with bullshit bingo-talk about dynamic asset allocation processes that are, I expect, robust, proprietary and risk-managed [“House!”].

In other words, there’s a curtain of guff that prevents you from really knowing what’s going on. Which is a problem because – contrary to the marketing team’s intentions – that makes me more nervous about the product, not less.

I think these funds are really designed to reduce friction for financial advisors. They get a low cost, low maintenance package that neatly complies with the risk regulations and doesn’t suck them into awkward client conversations about how believing in market-beating managers is like believing in Santa Claus.

But DIY passive investors who’ve taken the trouble to work things out for themselves are better served by the stable asset allocations offered by HSBC’s and Vanguard’s offerings.

Not your father’s ETF

So much for the fund-of-funds. What about the ETF of ETFs: db X-trackers SCM Multi Asset ETF?

A few fatal flaws get it gonged off:

  • It’s very expensive with an OCF of 0.89% – more than three times the cost of a Vanguard LifeStrategy fund.
  • Its remit is even wider than those funds-of-funds: the ETF can be all in bonds, or equities or cash depending on the mood of the manager.
  • It’s an active management ETF, which explains why it’s so expensive. The manager trades ETFs instead of shares but this is not a passive investing product.
  • There’s no more reason to buy this than any other active management vehicle. Chances are you’ll overpay for mediocre performance.

New developments

One other interesting thing to note – the fund-of-funds families are all following the trend towards greater bond diversification. Most devote a significant slice of their fixed income pie to foreign bonds, probably in an effort to combat the measly prospects of gilts.

This might make sense as far as it goes, but only Vanguard currently offers foreign bonds that hedge their currency exposure back to Sterling.

Without that hedge, foreign bonds expose you to greater volatility as overseas-denominated assets wax and wane against the pound.

Given that your fixed income allocation is meant to be as quiet as Gardener’s Question Time in comparison to the soap opera of equities, a hedged approach that offers diversification and stability is preferable.

Vanguard’s LifeStrategy funds beat most of their rivals on fees, too. Only the BlackRock Consensus funds are cheaper, but the few basis points difference isn’t worth worrying about in my view.

A final test would be a comparison of performance but very few index tracker fund-of-funds have been around long enough to make that relevant. A mere couple of funds have even got five year records, so you’re better off choosing on the basis of transparency and low cost value.

Take it steady,

The Accumulator

  1. i.e. Not a collection of actively managed funds or even hedge funds, which also come in fund-of-fund form.

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