BUOYED BY LOOSENING OF RESTRICTIONS, FUNDS OF FUNDS GAIN IN NUMBER, ASSETS: EASIER FOR MANAGERS TO BUNDLE OWN FUNDS

As investors wade through the ever-expanding sea of mutual funds, many are turning to funds of funds for both convenience and asset allocation.

Assets in such funds, which invest in other mutual funds, reached $29.3 billion on April 30, up from $18 billion a year earlier and just $11 billion at the same date in 1996, according to Financial Research Corp.

Net sales were $3 billion for the first four months of this year, up 58% from $1.9 billion the same period a year earlier. Last year’s net sales were $5.4 billion, compared to $4.2 billion in 1996 and $1 billion in 1995, reports the Boston-based research firm.

The fund-of-funds concept is not a new one, but it has gained considerable momentum since a 1996 change in the securities law loosened restrictions and made it easier for money managers to create portfolios exclusively of their own funds

Whereas only 33 funds of funds existed two years ago, there are more than 130 today, the Investment Company Institute reports.

Goldman Sachs launched four funds of funds in January. One, Growth & Income Strategy, pulled in a cool $105 million of assets in the first quarter. That’s more than what many funds attract annually.

Also pushing funds of funds are such big names as T. Rowe Price, Vanguard Group and Fidelity Investments, as well as brokerages like Smith Barney and banks like Norwest Corp.

“Product development has really ramped up since it became much easier to bring out one of these products,” says David Haywood, an analyst at FRC.

Despite the growing popularity, there are some significant downsides. Expenses are generally high due to the fact that most funds have two layers of management fees: the fund families’ fee, plus the fees of the underlying funds in the portfolio. According to Boston consultant Cerulli Associates, the average fund of fund charges investors $24 for every $1,000 managed — vs. $14 for the average domestic equity fund.

“too many costs”

Stephen Gorman, president of Gorman Financial Management in Norwell, Mass., isn’t all that keen on funds of funds. “There’s too many costs associated with them,” says Mr. Gorman, whose firm oversees about $50 million in assets. “Besides, I’d rather put the funds together myself — that’s what the client is paying me to do.

“Investors are paying for our ability to put together and assemble something akin to an All-Star baseball team,” says Martin S. Orgel, assistant portfolio manager of Boston’s Freedom Capital Management Corp’s FundManager, one of the most established families of funds of funds with $225 million in assets under management.

That’s questionable. Based on Morningstar data, more than half of all funds of funds ranked in the bottom quartile of their respective objectives for the year ended April 30.

Mr. Orgel points out that funds of funds tend to shine in bear markets when a diversified approach is rewarded. Even more serious, funds of funds face direct competition from advisers or wrap accounts, which offer a more personalized approach to asset allocation.

“We’re moving to an intermediary framework,” Mr. Haywood says. “There’s going to be no real reason to use these products because investment advisers will do it all for you.”

None of that is stopping more fund groups from jumping on the bandwagon. Freedom Capital, for example, just rolled out a fund of funds aimed at the international arena — bringing to seven the number of funds of funds it offers. And Charles Schwab Investment Management last month launched a fund of index funds, the MarketTrack All Equity fund.