Investors looking for a back door into popular mutual funds should be aware the cost of entry is sometimes more than it first appears.
Some offshore firms have recently started rolling out more mirror funds, a kind of mutual fund that aims to mimic the performance of a top-performing fund by investing in the same underlying assets. They may also require a lower investment minimum than a direct fund and let customers switch in and out of funds as often as they wish, without any charge.
But while fund names can sound strikingly similar - BlackRock, the US firm that is the largest money manager in the world, has a Gold and General fund, while Royal Skandia offers a BlackRock Gold and General mirror fund - there are key differences. For starters, investors could end up paying a higher unit price for underlying assets in a mirror fund, or get hit with fees that eat into their returns.
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"Mirror funds will have extra charges," warns Nitin Dialdas, the investment manager for Richmond Asset Management, based in Hong Kong. Some investors, he notes, end up paying a management fee for both the underlying fund as well as the mirror fund, plus administration costs. The charges can certainly add up. A recent report on pension-based mirror funds found that investors can miss out on as much as 22 per cent in returns over five years because of the different fees companies charge for going into the same fund, according to trustnet.com, a financial research site.
There are other concerns, too.
In some cases, a mirror fund's overall asset allocation can vary slightly compared with the one it is structured to replicate. That could inadvertently help - or hinder - a portfolio's performance over the long run. "That's something people don't seem to be aware of," says Sarah Lord, the wealth planning director for Killik & Co in Dubai.
Another crucial difference: many mirror funds hold a higher proportion of money in cash than a direct fund. At Friends Provident International (FPI), for example, cash holdings normally range between 0.75 and 1 per cent. "We have hundreds of thousands of Johns and Marys buying into the fund then buying into another fund, so we need liquidity for clients going in and coming out," says Matthew Waterfield, the general manager of FPI's Dubai office. "[Still,] that will impact the performance of the fund."
To be sure, direct funds have their own set of charges and may not always offer as much flexibility as mirror funds. Some investors in direct funds need to sell what they are in before purchasing new funds, or they have to wait until certain days of the week to get pricing updates if they are considering switching funds, says Mr Waterfield. Comparing regular funds against mirror funds "is like comparing apples to pears", says Vicky Spanner, the investment proposition manager at Skandia International.
However, some financial advisers say the downsides to mirror funds far outweighs their benefits. "As far as mirror funds are concerned, we don't believe in them," says Ms Lord.