Fund of funds feeding frenzy
I've been asked a few questions recently about the fees charged by funds of funds (FOFs). For those unfamiliar with the term, FOFs are funds (or Listed Investment Companies) which farm out money to other fund managers, rather than manage it themselves.
In the course of investing our model portfolios we looked at a few FOFs (in particular, those managed by Russell and Mercer) and their fees were comparable to other funds. I've never been a fan of FOFs, in part because of the potential for extra layers of fees, but there didn't seem to be any evidence of this occurring in this case.
But in other cases, it sounds like there might be a fee feeding frenzy going on.
Now getting to the bottom of the fee levels is difficult, since those charging hefty fees aren't required to disclose their full extent (and clearly aren't particularly keen on doing so). However it sounds like there's some investors out there paying around 3% a year (maybe more), plus upfront entry fees (plus anything paid to their advisor).
As we saw in an earlier post (Hurting a retirement) juicy fees are one of the best ways to destroy retirement savings. If you've got a million dollars in super and you're paying 3% on a range of FOFs, $10,000 in annual costs to your advisor and fees to accountants, tax advisors and administrators, you might be paying 4 to 5% a year in expenses.
An investor under that sort of fee-load would probably be better off just sticking their super in an industry fund and getting on with life. And that's assuming the funds perform OK. If a rapacious fee structure leads to dud investments (as it often does) it might get a whole lot worse than that.
So my question for today is 'how bad does the fund of funds feeding frenzy get'? What are your personal experiences and what do you know about the fees being charged by FOF promoters?