Fund of funds, also known as umbrella funds, spread investor money even further than a classic fund by investing customer money in the funds of other companies. They are often used in fund-based asset management and are available in a wide variety of forms.
- Fund of funds also enable asset management for small investors, as the entry-level sizes are extremely small.
- The highest possible share quota is documented in the fund prospectus and must not be exceeded.
- A fund of funds offers a significantly wider range of investment options than a conventional equity fund.
- In the case of a fund of funds, these fees usually apply to both the target fund and the fund of funds itself.
Asset management on a fund of funds basis
Short for FOF by abbreviationfinder, fund of funds also enable asset management for small investors, as the entry-level sizes are extremely small. In the same way as asset management in the traditional sense, the fund managers spread client money across a wide variety of investment segments. Asset managers must take the investor mentality and risk appetite into account when investing client money. This also applies to funds of funds. For this reason, funds of funds of a fund company are set up with different risk weightings. The risk weighting results on the one hand from the equity quota and on the other hand from the target funds.
Special structures for all risk classes
A fund of funds, which is aimed at the target group of very conservative investors, will have an equity allocation of no more than a maximum of 30 percent. The highest possible share quota is documented in the fund prospectus and must not be exceeded. Investors with a balanced risk / reward profile are more likely to fall back on a fund of funds with an equity quota of up to 50 percent. Savers who want a dynamic investment will opt for a fund of funds that can not only meet an equity quota of up to 10 percent, but also invests in dynamic markets such as emerging countries. The risk-reward ratio is significantly higher for a fund that invests 40 percent in bonds and 60 percent in stock corporations from emerging markets than for a fund
Aim of a fund of funds
Of course, as with other funds, the goal of a fund of funds is to achieve as high a performance as possible. However, they have a much wider range of investment options at their disposal than with a conventional equity fund or mixed fund. Funds of funds are of course not only used for fund-based asset management, but were originally intended as a broader diversification for investor money. For investors, a fund of funds offers the advantage that they no longer have to monitor their custody account in any way, but rather cover the market with a fund according to their risk appetite. However, there is also a disadvantage that should not be underestimated.
Criticism of funds of funds
As is well known, issue surcharges and management fees are charged for investment funds. The issue surcharges of the target funds are less criticized by the investor protectors, as they are rarely charged. Yet savers run the risk of paying twice. In addition to the issue surcharge, the fund companies also charge management fees, success fees and the like. In the case of a fund of funds, these fees usually apply to both the target fund and the fund of funds itself. Even if the manager of the fund of funds agrees special conditions with the management of the target fund, there will still be a partial double burden.
Selection of the fund of funds
When choosing a fund of funds, two components play a role. On the one hand, there is the strategic orientation, i.e. the question of whether the fund of funds corresponds to the investor profile in its overall orientation. The second aspect is of course the performance. Since the return must first be adjusted for the costs incurred in order to be comparable, the Association of German Investment Companies has developed a method that makes funds comparable, similar to the effective annual interest rate for loans. When making a selection, investors should therefore ensure that the information on performance bears the addition “according to the BVI method”. The investment in a fund of funds is of course optimized if the deposit itself is managed free of charge and the fund is issued with a discounted sales charge.