After much fanfare and some delay, investors will finally get a chance next month to check out
, the latest incarnation of the do-it-yourself fund.
But in a market that's about to get decidedly more crowded, is this upstart's service for you? The answer to that will depend on a few key factors, including your investment philosophy, how much you're planning to invest and how much trading you plan to do.
What It Is
Folios, or do-it-yourself funds, have gained popularity recently as investors have sought more control and transparency in their investments. (
recently discussed the upside and downside of folio funds.)
The nascent push into folios got a stamp of approval of sorts last week as fund heavyweights
said they planned to start offering investors customized, easily tradable baskets of stocks later this year.
In the wake of those announcements, Netfolio, whose original launch was slated for November but pushed back due to technical snags, finally put a March 5 date on the product's rollout.
Netfolio officials say the key difference between Netfolio and the other do-it-yourself funds will be in the advice it offers. Netfolio chairman, chief executive and founder James O'Shaughnessy is a firm believer in investing for the long-term. As evidenced in his book
What Works on Wall Street,
the former chairman and CEO of
O'Shaughnessy Capital Management
is a proponent of using quantitative strategies, not the stock market's flavor of the day, to manage money. He has even put his philosophy to work with mixed results in his small family of mutual funds, which he sold last year before launching Netfolio.
So it's no surprise that one of the core investing options Netfolio will offer is a personal fund especially tailored for investors based on O'Shaughnessy's quantitative strategies.
Before jumping into this new product, there are a few elements to consider. First, there's the cost. For a fee of $200 a year, or $20 a month and a minimum investment of $5,000 (the average minimum investment for U.S. stock funds is $2,500, according to
), the service is more cost-effective as you invest more money. A flat fee of $200 works out to be 4% of a $5,000 investment, but only 0.4% of $50,000, for example.
"You have to have a significant amount of money invested in these to make a difference," notes Robert Hegarty, director of research firm
investment management practice. Hegarty says someone with $5,000 who is just looking for market exposure might be better served in a low-cost index fund than in a service that lets them pick their own stocks. And someone with a large amount of money to invest may decide it's worth it to pony up for a financial planner.
How It Works
The way Netfolio works is pretty straightforward. Users fill out a brief questionnaire that asks such details as their ages, incomes, risk tolerance and amounts they currently have in other investments. Based on those answers, they then receive both an asset allocation recommendation and a personal fund of stocks and exchange-traded funds that can best help them achieve their investment goals.
And although that asset allocation recommendation will include a percentage in bonds, investors should note that Netfolio will not be able to sell investors the bond portion of their portfolio recommendations when it first launches.
O'Shaughnessy says he expects to have bond capabilities soon after the service launches, but he could not give a specific time frame. In the interim, Netfolio will advise clients to go with a low-cost bond mutual fund to satisfy the fixed-income portion of their portfolio.
While Netfolio gives investors the option to choose stocks of their own, the service may not be ideal for those who want to actively trade.
Choosing your own stocks works like this: If the investor isn't totally enamored of the portfolio designed by the Netfolio strategy, he or she can replace a stock either with an alternative suggested by the strategy or with a stock the investor is particularly fond of.
Once the portfolio is selected, users can rebalance their portfolios according to the fund's underlying strategy as many times as they choose, although the company suggests investors do so only once a year. Real-time trades made outside of the rebalancing cost $20 each, a cost that would add up for active traders.
Active Traders, Go Home
Those who want to actively trade are not welcome, anyway. As a registered investment adviser, O'Shaughnessy says Netfolio's compliance department will contact investors who are trading excessively and could even decide to "fire" a client who trades too much.
But trading is not the point of Netfolio's service. O'Shaughnessy says the market's meltdown last year illustrated how investors often shoot themselves in the foot by selling out of stocks after they've already tanked -- even though that is the absolute worst time to sell. Investors need to choose a strategy and stick to it, regardless of what the market does, O'Shaughnessy says.
Netfolio's solution to this will be to invest in a portfolio that has an allocation of large-cap growth stocks, large-cap value stocks and small-cap stocks that will balance each other out in rough markets. Netfolio's system devises such portfolios for its clients using different strategies depending on the investor's time frame, risk tolerance and how much money he or she is investing.
Of course, whether or not that will work remains to be seen. Netfolio does tell investors which strategies are used in their portfolios and how those strategies have performed historically against benchmarks of the investor's choosing. However, because that performance data is based on the fund's underlying strategy and not the stocks themselves, Netfolio will not be able to give historical performance data if an investor replaces a stock with one chosen outside of the strategy. O'Shaughnessy says that capability should be available by the end of 2001.
As the saying goes, past performance is no guarantee of future results. Morningstar equity fund analyst Kelli Stebel notes that while the mutual fund industry was excited when O'Shaughnessy put his novel concept of strategy indexing to practice when he launched his funds in late 1996, the performance has not always lived up to the hype.
"It's definitely interesting, but what investors are looking for is solid performance," says Stebel. "When he can prove that he can deliver, then he will draw more attention."
O'Shaughnessy himself readily admits that there will be years in which the strategies will not perform well. The point, he says, is to hang on for the longer term so that the investment theories can play themselves out.
"We knew at the time and we said at the time that
Cornerstone Growth has many years that it will not do well," says O'Shaughnessy. "You have to commit to it for a long time."
And those diehard do-it-yourselfers who want to try out their own investment strategies can also do so with Netfolio. For a fee of $500 a year or $50 a month, users can subscribe to Power Netfolio, which lets them devise and backtest different strategies using the
Standard & Poor's
Compustat database. The company also offers plans for high net worth investors of $100,000 or more and for registered investment advisers.
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