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I’m often asked if it’s
OK
to have all or most of your
money with one fund company.
My answer is that it depends. In some cases, it’s
perfectly fine to invest with one fund company.
The most important reason is that mutual fund assets
are held by custodians not affiliated with the fund
company. Thus, a fund company that was in financial
trouble couldn’t simply start tapping mutual fund
assets to make ends meet. The custodian holds a
fund’s securities and processes transactions. I’ve
never heard of a fund company employee stealing
from a
1940
Act fund, though of course there are
other things a fund company employee could do to
harm shareholders. It was telling that, when the
Amerindo founders were accused of tapping client
funds about
10
years ago, the mutual fund share-
holders were not harmed.
What if the fund company goes bankrupt? It’s
certainly possible. But we went through the financial
meltdown of a lifetime in
2008
–
09
and no fund
companies went bankrupt. The reason is that asset
management is a capital-light business that gene-
rates steady fee income year in and year out. Nearly
every fund company actually stayed profitable
throughout the downturn. One fund company did see
its parent company go bankrupt. Neuberger Berman
was owned by Lehman Brothers at the time when
Lehman went belly-up. However, Neuberger was insu-
lated from that. It was subsequently bought out by
the firm’s principals, and investors in its funds were
unharmed. Moreover, the custodian relationship
ensures that a struggling company wouldn’t be able
to steal shareholder money even if it wanted to.
That said, I wouldn’t put all my money in the actively
managed funds of a company that runs all its money
in-house. There are some real risks in a situation
where all your money is being managed by one group
of people. Think of Janus in
1999
: The firm was
heavily tilted to the growth names that got hammered
in the
2000
-
02
bear market, so quite a few of its
funds got walloped.
Simply having proper diversification into value and
bonds would have lessened your risks, but you’d have
to have gone outside Janus for much of that expo-
sure. So, boutique firms are generally not places you
should invest your whole nest egg.
Besides having similar biases, you’d also be at risk
from an exodus of talent. This wouldn’t likely be
an overnight disaster to your portfolio, but it could
lead to a prolonged slump if you didn’t move your
money. The industry cliché says that all of a firm’s
value rides an elevator out the door each day,
meaning that all its value is in the people running
money—and they can leave anytime they want.
A giant firm like Fidelity or T. Rowe Price can offer
tremendous style diversification, but you still shouldn’t
have all your money with them, because of the
small chance that a bunch of managers and analysts
could leave at the same time. However, if you put
a sizable chunk of your assets at Fidelity’s index funds,
investing your whole nest egg there would be fine.
Vanguard is the firm at which I would feel most com-
fortable investing all my money. It has passive funds
for just about any need, so I wouldn’t have to worry
about everyone making the same bet or leaving at the
same time. In addition, it spreads actively managed
money around quite a few subadvisors, so there’s not
much exposure to any one subadvisor. And if there
were a brain drain at one of the subadvisors, Vanguard
could easily fire the firm and move the money to a
more stable company.
So, by all means diversify by asset class, style,
and sources of active management. But you
can invest quite a lot with a good firm without losing
any sleep.
K
Is It Safe to Invest All Your Money With
One Fund Company?
The Contrarian
|
Russel Kinnel
Our Contrarian Approach
I go against the grain to
find overlooked funds that may
be ready to rally.