 Personal Finance PowerPoint Presentation Fund of Fund, F-O-F. Prepare to get financially fit by practicing personal finance. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Most of this information comes from Investopedia Fund of Funds, F-O-F which you can find online. Take a look at the references resources continue your research from there. This by James Chen updated April 12, 2022. In prior presentations we've been taking a look at investment goals, strategies, tools keeping in mind the major categories of investments that being the fixed income, typically the bonds, the equities, typically the common stock also thinking about other tools we might be using like mutual funds like ETFs helping us possibly to diversify with less of an initial upfront investment as opposed to investing in individual stocks and individual bonds. Keeping that in mind we're now thinking about what is a Fund of Funds F-O-F? You might think that F-O-F would stand for like something like friend of a friend or something like that but no Fund of Funds that is a Fund of Funds F-O-F also known as a multi manager investment is a pooled investment fund that invests in other types of funds. So in other words its portfolio contains different underlying portfolios of other funds. These holdings replace any investing directly in bonds stocks and other types of securities. Ok so if we're thinking about an individual investor saving say for retirement or something like that we could be buying individual stocks, individual bonds but that's often costly and difficult to diversify with. So we might be purchasing something like mutual funds or ETFs attempting to pool our investment with other money from other investors the fund manager then allocating our investments across multiple different investments in accordance with the strategy of the fund. So that's going to be a way for us to diversify but you also might have a fund that is using the capacity to diversify by investing in other things which are investments in other funds for example. So it gets a little bit complicated in terms of the layers going on but the strategy that we're thinking about as an individual investor may be similar that we're investing in say mutual funds helping us to diversify in some way. Also remember that when you're investing in a 401k plan or an IRA some kind of retirement plan then typically the tool that is being used is some kind of like mutual fund or ETF that is now under the umbrella in essence of a retirement plan like a 401k or an IRA or something like that. Ok so FOS that's not friend of a friend that's a fund of funds that's what that stands for usually invest in other mutual funds or hedge funds so they are typically classified as feathered or only able to invest in funds managed by the FOS managing company or unfettered or able to invest in funds across the market. So how a fund of funds and FOS works the fund of funds FOS strategy aims to achieve broad diversification and appropriate asset allocation with investment in a variety of fund categories that are all wrapped into one portfolio so that should be the ease for the end investor for us. That's what we like to see have it all done in some way so you got it all in one portfolio there. So there are different kinds of FOS funds of funds with each type acting in on a different investment scheme. So scheme often sounds like it's a negative term to me at least like it's like it's going to be some kind of someone scheming in some kind of negative way but it's just a strategy in essence here being used as an FOS fund of fund may be structured as a mutual fund a hedge fund a private equity fund and investment trust. The FOS may be feathered meaning it only invest in portfolios managed by one investment company. Alternatively the FOS may be unfettered letting it invest in external funds controlled by other managers from other companies. So when you're looking at you know the funds that are being managed are they only allowing the people who got funds of funds and I've got a fund that includes other funds to the other funds only include funds that are also managed by the same company or can include other funds that are outside of the funds that are managed by the current company that the fund to fund is being managed by. So fund of funds advantages typically the FOS fund of funds attract small investors who want to get better exposure with fewer risks compared to direct directly investing in securities or even in individual funds investing in an FOS gives the investor professional wealth management services and expertise investing in an FOS fund for fund also allows investors with limited capital to tap into diversified portfolios with different underlying assets which is kind of one of the keys of individual investing. We want to get that diversification possibly with a lesser of an upfront money that we are particularly investing in many of these would be out of reach for average retail investors. For example hedge funds typically require six figure minimum investments or require investors to have a minimum net worth or both. Most FOS fund of funds require a formal due diligence procedure for their fund manager both their own and those managing the underlying funds. So applying managers backgrounds are checked which ensure the portfolio handlers background and credentials in the securities industry fund of funds disadvantages. Though FOS provide diversification and less exposure to market volatility those returns may be lessened by investment fees that are typically higher than traditional investment funds. Higher fees come from compounding of fees on top of fees. So now you've got funds that are managed right and now you've got funds that are managed that are have other funds in them. So now you've got two layers of fund managers right you got the fund managers that are running the funds the original the lower level funds and then the fund managers that are compiling those funds together increase in the overall fees in essence. So the most mutual like most mutual funds FOS carry an annual operating expense known as the expense ratio. So that's the one we want to be comparing to see if it's appropriate or comparable to like type of investment. So as well as manage fees and operating costs. However FOS investors are essentially paying double because the underlying funds in the FOS all have their annual cost and fees to in the past funds of funds prospectus prospectus is didn't always include the fees of the underlying funds as of January 2007 the SEC secured an exchange government oversight board began requiring that these fees be disclosed in a line called acquired fund fees and expenses a F F E. This seems important to me that seems like a pretty good move to be more transparent in terms of the fees that are actually you know being underlined here because you got the fees of the fund manager that you're investing in and the fees of the funds that they're investing in because they're not investing in individual stocks or securities but in other funds. So a fund of funds might charge annual management fees of 0.5% to 1% to invest in funds that charge another 1% annual management fee. So the F O F investor in some is paying up to 2% small wonder that after allocating the money invested to fees and other payable taxes the returns of fund to funds investments may generally be lower compared to the profits that single manager funds can provide even if the funds perform very well. Picking good fund managers and funds can be difficult to especially if the F O F is feathered the F O F may end up owning the same stock or other security through several different funds thus reducing actual diversification. What are the pros you've got the ultimate in diversification because now we have funds that are going to be compiling other different funds and those other different funds are compiling different underlying security. So that's a huge goal that we're typically looking for professional management expertise alleviation of risk and volatility exposure to assets usually beyond small investors. What are the cons side of things. You got the additional layer of fees because now you're paying the fees to the manager to compile the funds of the funds and each of the funds of course have fees as well as they compile their underlying components and that's one of the big downsides. You got the risk of overlap in holdings. So if you have multiple funds that are holding other securities you could have some multiple funds that are holding on to the same underlying securities overlapping some of those investments difficulty in finding qualified managers funds real world example for fund of funds since they are so varied funds of funds can be hard to track as a group and to compare however and index does exist we've got the Berkeley fund of funds index sponsored by Berkeley hedge the index of course is an attempt to give us kind of an average of the performance of a particular area such as the funds of funds. So it's a provider of data on alternative investments is a measure of the average return of all F O F funds of funds that report into the company database. So through Q one quarter one two thousand twenty two for instance one hundred and fifty six funds of funds had yielded on have an average return of point three three percent year to date the S and P five hundred during the same period lost more than seven point five percent. So our funds of funds common dedicated funds of funds may be less common than standalone mutual funds or ETFs however the SEC security and exchange estimates that approximately forty percent of all registered funds hold an investment in at least one other fund. How much assets are invested in funds of funds according to the SEC security and exchange total net assets and mutual funds that invest primarily in other mutual funds reach over two point two dollars in two point five four trillion dollars in two thousand nineteen are funds of funds regulated by the SEC securities and exchange. Yes like all other pooled investment products F O F are also overseeing by the SEC security and exchange federal government entity in particular SEC rule twelve D one four updated in two thousand twenty sets out procedures that provide a consistent framework for fund of funds arrangements. The SEC also requires F O F's to disclose their fees in a transparent manner.