Don't Buy All of Your Mutual Funds in the Same Place

There are some good arguments for spreading your investments across funds offered by different management companies.

Sure, it's convenient to put all of your money to work with one fund family, and if you're investing through a 401(k) plan, you may not have a choice. Plenty of these employer-sponsored retirement plans limit their offerings to a single family of funds.

You might think this is OK, particularly if you spread your assets across funds in a variety of investment classes, such as domestic stocks, foreign stocks and municipal bonds.

That's not necessarily true.

The most obvious argument for spreading your bets around is that each fund family has its own strengths and weaknesses. A mutual fund company may be particularly strong across domestic stock funds because of the expertise of its managers, stock analysts and/or technology group, while others may have superior performance in international or fixed-income funds.

In addition, some fund families may excel at value investing, while others explicitly focus on growth. To construct a well-balanced portfolio of funds, investors are best served by investing to a fund family's strength.

Another argument for spreading your mutual fund holdings across several fund families is that it tends to increase the risk in your portfolio, since funds in the same family often have similar holdings and common characteristics.

In an article published in the June 2007 issue of the Journal of Financial and Quantitative Analysis, Edwin J. Elton, Martin J. Gruber and T. Clifton Green found that funds within a single fund family are more highly correlated -- meaning they are more likely to perform in line with each other -- than are a group of funds spread across multiple fund companies.