By John Wasik
CHICAGO, April 12 On paper, multi-asset funds
look great. These tactical "fund of funds" let an investor cover
objectives ranging from inflation protection and income to
international growth, while enabling managers to diversify
quickly and avoid market sell-offs.
On the market for years, multi-asset funds have gained
traction since the 2008 financial crisis. They have come into
focus lately because many retirement plans have added them to
If the funds performed their jobs well at a low cost, then
they would make sense to me. Picking a diverse mix of asset
classes is challenging, and it would be helpful to average
investors to have it done for them.
But the way they are structured now - with multiple layers
of fees and high turnover of holdings being bought and sold -
only ensures that fund managers will benefit, not you.
THE BIG EXAMPLE
Take the PIMCO Global Multi-Asset A Fund, which is
run by a company with more than $2 trillion under management and
a great reputation as the world's largest private income-fund
manager. As one of the largest funds in this category with $5
billion in assets, it offers an array ranging from emerging
markets stocks to bonds (more than half of the portfolio).
But when you look at the expenses, it's hardly a good value.
The "A" class of the fund charges a 5.5 percent commission. On
top of that, PIMCO will charge nearly 1.6 percent a year for net
management expenses, plus a 0.25 percent maximum 12(b)1
marketing fee. Over three years, that alone would cost a
projected $1,000 for each $10,000 invested.
Multi-asset funds have yet another layer of expenses that
are not immediately apparent, nor does an accounting turn up in
the annual expense ratio. Since the fund moves in and out of
asset classes, expressed as "turnover," there are transaction
costs for buying and selling securities.
The PIMCO fund has a turnover of 94 percent, meaning nearly
all of the securities within the portfolio are bought or sold
within a year. That expense could cost you an additional 1
percent a year, which is subtracted from your total return.
What do you get for all of this money? Not so much right
now. In the past year, the PIMCO fund has returned 5.4 percent,
compared to the 19.3 percent for the SPDR S&P 500 Index ETF
, a passive basket of large U.S. companies, that only
charges 0.09 percent in fees by comparison.
With all the fees wrapped in, that means if you bought
$1,000 of the PIMCO multi-asset fund a year ago, and all charges
were deducted, it would only be worth about $600 right now,
while the same amount in the SPDR fund would be worth about
Similarly, high expenses and disappointing returns crippled
other major funds in the category.
The $121 million Guggenheim International Multi-Asset Income
ETF, which invests in global stocks, has a 0.7 percent
expense ratio and a 2.6 percent three-year return.
The BlackRock Multi-Asset Income Investor A fund,
sports better performance - nearly 10 percent over three years -
but is hamstrung by a 0.98 percent expense ratio and 5.25
percent sales charge.
While this is just a small sample of this category, nearly
every fund of funds is going to have the same problem of high
expenses, which will clip returns.
You can either build a portfolio with low-cost
exchange-traded funds or consider a plain-vanilla balanced fund
such as the Vanguard Balanced Index Fund.
It keeps a constant 60 percent of its holdings in a broad
stock-market index and 40 percent in a bond index. The fund's
expense ratio is 0.24 percent annually; there are no other
charges. It's up almost 10 percent over the past three years.
Also see the "ready to go folio" categories at
Folioinvesting.com (), which can
match a specific objective you have in mind to a pre-designed
As a rule, fund expenses will consistently devour returns
over time; they're even more pernicious with actively managed
portfolios. The greater the expenses and number of managers
involved, the lower the returns. This "cost matters" maxim holds
true no matter how many tools managers have at their disposal.