The email came in at 6:47 on a Monday morning. A reader from Kuala Lumpur had attached a screenshot of his portfolio. He had done everything his advisor told him. He owned five different multi-asset funds. Each one promised diversification across stocks, bonds, and alternatives. He had spread his money across them because he wanted to be safe. His question was simple. Why was every fund down at the same time? I zoomed in on the screenshot. Then I zoomed in again. I recognized the top ten holdings in three of the funds. They were identical. He thought he had a garden. He had a lawn with the same grass planted five times.
I remember the first time I made this mistake. I was in my early thirties and proud of myself. I owned three different balanced funds. One from a big firm, one from a boutique, one from a fund house in Europe. I thought I was building a fortress. Then I opened all three prospectuses on my desk and started comparing the holdings. The same tech stocks appeared in every single fund. The same corporate bonds. The same managers, essentially, dressed in different jackets. I had paid three sets of fees for the same basket of assets. I wasn’t diversified. I was concentrated with extra paperwork.
Here’s what I wish someone had shown me with a blender. A multi-asset fund is a blender. You put in stocks, bonds, maybe some real estate. You push a button. Out comes a smoothie. If you buy five different blenders from five different brands, you don’t have five different smoothies. You have the same ingredients pureed five times. The ingredients don’t change just because the label changes. The only thing that changes is the number of blenders you have to clean. And the number of fees you pay.
I had a client in Hong Kong who had built an entire retirement portfolio around three multi-asset funds. He had been investing for twelve years. He thought he was sophisticated. When I ran the overlap analysis, the three funds shared 78% of their equity holdings. The bond portfolios were almost identical. He was paying an average fee of 1.2% on each fund. He could have owned the same underlying assets in a single fund for 0.4%. The difference over twelve years was enough to buy a small car. He sat in silence for a long time when I showed him the math. Then he asked me why his advisor had done this. I told him I didn’t know. But I had a guess.
I keep a colander in my kitchen that reminds me of this. When you pour pasta into a colander, the water drains out. The pasta stays. The water is the fees. The pasta is the actual investments. If you have five funds, you have five colanders. The pasta is the same. The water you drain is the fees. More colanders don’t mean more pasta. They mean more water down the drain. I think about that every time someone tells me they own five different funds from five different firms. I want to ask them how many colanders they have in their kitchen. Most of the time I don’t. It sounds rude. But I’m thinking it.
The reader from Kuala Lumpur wrote me again last week. He had taken my advice. He pulled up the fact sheets for all five funds. He highlighted the top ten holdings in each. He used a small notebook to write down the overlaps. When he was done, he saw that fund one and fund three held the exact same US tech stocks. Fund two and fund four held the same bond ETFs. Fund five was just a mix of everything from the other four. He told me he felt like he had been paying five cab drivers to take him to the same address. I told him that was exactly right.
I have a rule now. I own one multi-asset fund. One. If I want exposure to a specific region or sector, I buy a separate fund for that. I keep them separate because I want to see what I actually own. A multi-asset fund is fine if you understand what’s inside it. The problem is when you own three of them and you think you have a strategy. What you have is a mess. A mess with a fee structure.
I still get calls from friends who want to know which multi-asset fund to buy. I tell them to pick one. Just one. Then I tell them to look at the underlying holdings. If they can name the top ten stocks in their fund without opening the prospectus, they’re paying attention. If they can’t, they’re just blending. I don’t say that to be mean. I say it because I was that person. I had the three funds. I had the three fee statements. I had the one underlying portfolio. It took me years to figure out I wasn’t diversifying. I was just multiplying.
The reader hasn’t emailed me since that last exchange. I hope he consolidated. I hope he’s paying one fee instead of five. I think about him sometimes when I open my own statements. I think about how easy it is to confuse complexity with sophistication. A blender with one setting does the same job as a blender with ten settings. The difference is how much counter space it takes up. And how much you paid for the extra buttons.
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