Mixed funds have been around for a while and the underlying concept is very appealing. In contrast to a pure equity or bond fund, mixed funds include both of these classes as well as other types of investments. The idea is that these different elements operate at least partly independently of one another, so that a crash in one asset class will not plunge you into disastrous losses. Furthermore, you can leave all the managing and monitoring to the fund managers.
Multi-asset funds are a modern variant of the familiar mixed fund, and critics claim that this is just a new label used primarily for marketing purposes. Whatever the case, an important issue for many investors has arisen from the plethora of ETFs and index products that are now available in the market. Given that multi-asset/mixed funds have charges that can be quite substantial, would it be better to put together one’s own mixed fund? This would be achieved by combining a few single-asset-class trackers such as equities, bonds and real estate, and a couple of other asset classes such as resources and infrastructure.
The idea makes a lot of intuitive sense. If you are willing to be reasonably active and handle your own investments, you can save on fees and run your own mixed fund the way you want. However, it is not quite as straightforward as it seems.
The Essence of a Mixed Fund and Its Appeal
Ideally, a mixed fund will see you through all types of market conditions by ensuring that the asset allocation is consistently optimal. Indeed, this is the most important aspect of investment management. By now, it is pretty clear that there is no point in trying to "beat an index" or in paying someone else to do so.
Selecting stocks with the goal of beating an index such as the S&P 500 (or the FTSE 100 in the United Kingdom) often fails. If you want to "buy the market," just go for a tracker. What really counts, and where active management can and does make a positive difference, is through a prudently selected and constantly monitored mix of asset classes. But should you pay someone to do this for you or can you do it effectively yourself?
The Do-It-Yourself or Outsourcing Decision
The correct choice depends on your particular preferences, relevant knowledge and time available, and whether or not you can find a good, (but not excessively expensive), mixed fund.
There are several compelling reasons not to do it yourself. Firstly, emotions often get in the way of good investment decisions, and if you have an objective professional making them for you, this problem disappears. Secondly, there is the obvious issue of time. Unless you adopt a totally passive and static approach to asset allocation, you need to follow the markets of all asset classes in which you are (or could be) invested in order to manage your mixed fund properly. This can be quite time-consuming, and if the process draws time away from other work activities, it's probably worth getting a trained professional to do it.
On the other hand, no one else will care about your money the way you do. Though, this is not necessarily a problem if you can find competent and conscientious fund managers. If you invest some time upfront doing this, you will be able to relax down the line while watching your assets grow.
Are The Fees Worth It?
Nonetheless, the fees have to be in proportion to the gains. No matter how diligent the managers are, they need to generate sufficient returns that will both pay for their services and allow your investment portfolio to grow. Furthermore, there needs to be sufficient transparency for you to know whether or not this is the case, and it is not always evident until after the fact.
Multi-asset or mixed funds can be quite expensive, so you need to be sure you will get what you pay for. The year-end 2012 S&P Indices Versus Active Funds Scorecard (SPIVA) indicated that "most active managers in all categories except large-cap growth and real estate funds underperformed their respective benchmarks." So you will need to do your research to find one of those relatively rare mixed funds that really is worth paying for.
The Bottom Line
The issue of buying into or creating your own mixed fund is quite tricky. If you do not have the time or inclination for a DIY investment strategy, you need to devote some serious attention to finding the right fund and keeping an eye on it over time. If you want to do it yourself, you may outperform the pros, but you will need to keep your emotions out of it, stay informed, and make prudent decisions as conditions change.