With a universe of more than 9,500 mutual funds, it is not at all uncommon to see investment portfolios with a potpourri of mutual funds from different fund companies. It is very common among investors who work with a brokerage firm where financial advisors have access to a wide range of fund families. If you are a do-it-yourself investor, you might add funds from different families based on their recent performance or as a way to achieve greater diversification. But, is that a wise strategy? What would you expect to accomplish by investing in funds from different fund families that you couldn’t achieve with funds from one fund family? These are the reasons why investors invest in multiple fund families and why they might want to reconsider.
Fear of Financial Failure
One reason investors give for spreading their assets around to different fund companies is to minimize their exposure to any one company in the event of financial failure. First, it should be noted that there has yet to be a financial failure or bankruptcy reported by a mutual fund company. It’s not that it couldn’t happen, but it’s highly unlikely. Even if it did, investor assets are protected because they are “walled off” from the company, held in trust by a custodian – a separate legal entity. They are not assets of the company and, therefore, not subject to creditor claims. If a mutual fund company did fail, the assets are still accessible to customers through the custodian.
The greater risk exposure for investors is market risk; so, if it is diversification you want, you should focus on diversifying by mutual fund type, not mutual fund companies. Fund companies such as Vanguard and Fidelity offer several hundred different types of mutual funds, including perennial top performers, which is enough to achieve optimum diversification for most investors’ needs. However, some investors might want to add exposure to a particular market sector or niche that isn’t covered by a fund family, so they may purchase a mutual fund as a one-off from another family.
For example, you might have a strong interest in companies that are environmentally responsible, so you would seek out a mutual fund with a strong track record of investing in such companies. Generally, these types of funds are not core holdings; rather they form a sliver of a portfolio as a complementary holding.
Investing in "Winners"
Investors who believe that actively managed funds are a way to enhance portfolio performance, either as a sole investment strategy or as a complementary strategy, will sometimes cobble together a portfolio with funds they believe have the best opportunity to outperform their benchmark indexes. While it is very difficult to identify actively managed funds that consistently outperform their benchmarks, the strategy has a better opportunity of working when assets can be diversified among several different funds from different fund families. Although the strategy does have the potential to generate greater returns, it comes at a higher cost due to higher investment management fees.
Is it Worth the Extra Cost?
Perhaps the biggest reason to avoid the use of multiple fund families is the cost of investing, especially if you invest in funds the charge a sales load. Most of these funds offer breakpoints that reduce the sales load when an investment threshold is met. Some offer breakpoints that will reduce the charge to zero, but they might be as high as $100,000. Even no load funds, such as Vanguard, offer funds with lower management fees for larger investments of $10,000 or more. If you are going to mix your fund families, it is important to be aware of the breakpoint thresholds to keep your investment costs to a minimum.