Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

Investors Turn to Meta Funds,Trying to Do Lynch One Better

Becky Chambers and her eight-person stock club in Cincinnati are thinking conservative investments and looking beyond individual stocks to "meta funds," funds of funds that invest in, you got it, mutual funds.

By investing in just one outlet, they offer a vast allocation of equities, bonds and cash - all managed by several investment styles.

This year Cerulli Associates projects a 33% bump in these instruments, topping $228 billion all told. Projecting ahead, the firm figures they will nearly triple to $621 billion by 2007.

Abroad, meta funds are providing employment opportunities; London investment banking firm Schroders recently opened a franchise for them in partnership with Standard & Poor's. Investment advisors are seeing meta funds crop up in retirement plans.

A decade ago, Lipper tracked just three of these funds. Now there are more than 495, counting all share classes. Last year alone, 88 meta funds launched.

"Different asset management firms are starting to roll these out," said Morningstar analyst Langdon Healy. "This reflects investor demand, because people see the need for broader diversification than two years ago."

It's a psychology play. Middle America wants to be in the market. But it wants to be safe, said Randy Yoakum, chief investment officer and senior portfolio manager of Washington Mutual's WM Advisors. "Investors are saying, I want predictable, stable products.'"

Rusty Farrell, a Knoxville, Tenn., broker, says his clients are increasingly interested in lifestyle funds-of-funds as part of their retirement portfolios.

"With 401(k)s in particular, people feel as if they've missed the boat with poor asset allocation," he said.

While consumers look to diversify, it's mainly fund companies and banks pushing this product. Lipper analyst Jim Shirley said growth is due to "80% push and 20% demand."

A case in point is Charles Schwab's new consumer ad campaign. Ads in mainstream magazines such as Atlantic Monthly read: "Take everything that's good about having one of the best money managers in the country, then multiply it by four."

But they've got weaknesses. "Funds of funds suffer from one permanent flaw: fees on top of fees," said Tony Sagami, president of institutional money management company Harvest Advisors of Austin, Texas. "The master fund will charge a management fee as well as the funds that it invests in. The result is that these funds have very high expense ratios."

With an expense ratio of 2.11%, the Merriman Leveraged Growth fund is well higher than the typical 1.25% to 1.5% common for growth funds. "That means that the fund manager must have some special skills to make it worth the extra expense," Sagami said.

In the case of Merriman Leveraged Growth, it lost 6.27% over the last year, a better performance than the Vanguard Index 500 funds, which lost 15.2%. "Paul Merriman certainly earned his higher fee," Sagami said. Some sponsors will eliminate or cut the fees if they invest within their firm's family.