Definition of fund of funds

Sometimes called umbrella fund, this is a unit trust run by an asset manager who invests not in shares or bonds, but in other funds.

There are two types: fettered, where the fund invests in funds managed by its own company, and unfettered, which gives the manager freedom to invest in funds run by other managers.

These products typically offer investors exposure to a variety of asset classes, such as bonds, equities and property, and a range of investment styles.

However, many experts question whether fund of funds are the right option for private investors. A common criticism is the high cost of these products due to the double layering of fees. Investors are typically charged annual costs of 2.5 per cent each year, compared to about 1.5 per cent for a single manager fund.

Experts believe fund of funds are generally better suited for smaller investors that want to gain access to a range of different asset classes or for those whose advisers do not have the expertise to make single manager recommendations. Wealthy sophisticated investors are likely to be better off constructing their own portfolios or employing a discretionary portfolio manager. 

Example
A cheaper option for investors looking for a “one-stop shop” is low-cost fund of passive funds. These products invest in a range of passive vehicles, such as exchange traded funds (ETFs) and index-tracking funds.

They too offer investors a way to gain exposure to a broad spread of assets or themes, but their running costs are cheaper because passive fund charges are much lower than actives. Passive funds of funds typically charge about 0.80 to 1.2 per cent each year. [1]

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