By Dawn Smith
If your eyes glaze over when you hear about asset allocation and portfolio rebalancing, you might consider an all-in-one mutual fund. It invests in other funds, so that you can diversify all at once. Most of these "funds of funds" fall into one of two camps:
1. Target retirement funds, such as Fidelity Freedom 2010 /zigman2/quotes/200408269/realtime FFFCX -0.66% and Vanguard Target Retirement 2015 /zigman2/quotes/200793742/realtime VTXVX -0.83% , aim to be your only retirement fund. Most get more conservative as you age, moving toward bonds and away from stocks. The simplicity often appeals to younger employees deluged with 401(k)-plan choices.
2. Static-allocation or "lifestyle" funds, such as Vanguard LifeStrategy Income /zigman2/quotes/208340357/realtime VASIX -0.33% and T. Rowe Price Spectrum Growth /zigman2/quotes/202754146/realtime PRSGX -3.40% , seek to reflect your risk tolerance instead of zeroing in on a retirement date. Some, such as Vanguard's LifeStrategy series, are meant to be stand-alone funds. But they still need occasional monitoring, as risk tolerance can change.
Recently, we went searching for mutual-fund families with solid, no-load funds-of-funds programs. We required expense ratios in the bottom 50% of their categories -- some funds charge a double layer of fees -- and demanded initial minimums for taxable and IRA accounts of $5,000 or less. Offerings from three major no-load fund groups met our criteria.
Fidelity's Freedom funds were launched in 1996, with 10 portfolios now. The most conservative, Fidelity Freedom Income /zigman2/quotes/201544608/realtime FFFAX -0.38% , has just 20% in stocks. Ren Cheng manages the Fidelity Freedom funds, shepherding them until they reach the allocation of Fidelity Freedom Income fund, which happens five to eight years after their target dates. Investors should note that the Fidelity Freedom long-haul offerings are anything but conservative. Gregg Wolper, senior fund analyst at Morningstar, says Fidelity Freedom 2040 /zigman2/quotes/204957035/realtime FFFFX -2.69% has almost 90% of assets in stock funds, and much of its fixed-income slice is in high-yield junk-bond funds. "That could surprise some people."
Of course, if your retirement is 35 years away, this mix isn't unreasonable. Fidelity charges an annual expense ratio (0.08%) on top of underlying fund fees. But the funds' total combined expense ratios are reasonable, ranging from 0.68% for Fidelity Freedom Income to 0.91% for Fidelity Freedom 2040.
T. Rowe Price
This firm offers static-allocation funds through its 14-year-old Spectrum series and target-retirement funds launched in 2002. Spectrum encompasses three funds: T. Rowe Price Spectrum Growth, Income /zigman2/quotes/209256313/realtime RPSIX -0.34% and International /zigman2/quotes/202952900/realtime PSILX -2.00% . These aren't meant to fly solo, making them a good option for investors who already have one or more funds they're happy with.
There are also nine target retirement funds. These reach retirement with a greater weighting in stocks -- 55% -- than major rivals, which T. Rowe Price says is prudent now that retirees live longer. The firm doesn't charge an expense ratio for these funds, only the pro-rated fees of the underlying funds. Annual fees for the funds run from 0.59% for T. Rowe Price Retirement Income /zigman2/quotes/204238425/realtime TRRIX -1.03% to 0.83% for T. Rowe Price Retirement 2040 /zigman2/quotes/208661988/realtime TRRDX -2.74% .
Vanguard's static-allocation series, called the LifeStrategy funds, consists of Vanguard LifeStrategy Income, Conservative Growth /zigman2/quotes/206907554/realtime VSCGX -1.08% , Moderate Growth /zigman2/quotes/200925471/realtime VSMGX -1.80% and Growth /zigman2/quotes/207636484/realtime VASGX -2.47% . These invest mainly in index funds, plus the actively managed Vanguard Asset Allocation fund. In 2003, the company launched the Vanguard Target Retirement funds. Compared with Fidelity and T. Rowe Price, Vanguard's six portfolios are the most conservative, notes Gareth Lyons, fund analyst at Morningstar. As with most Vanguard offerings, fees are quite low. Vanguard Target Retirement 2005 is cheapest at 0.21%. LifeStrategy fund expenses run 0.27% to 0.28%.