Why funds of funds cost more than they are worth

One of the best ways of investment used to be to buy a mutual fund. Mutual funds hold stock for you, make sure you get the best interest, or at least they used to. The idea was that the management of the fund, who knew how the stock market worked, tracked the performance of the companies and their stock, and made sure that the holders of shares in the fund (who do not own the actual stock) get the maximum dividend by a combination of holding stock with high dividend and selling shares which underperform.

Funds of funds cost you twice
If you buy mutual funds, there is a good chance that you have been offered funds of funds. The idea is very simple: Since mutual funds are good in a specific area, like pharmaceuticals or IT, you should be able to get more performance out of the money you invest if the funds company can get a number of funds from different areas, put them together in a basket, and give you a share of the growth of each.
Excllent idea. But flawed. And what is the problem? You pay twice.
A fund of funds consist not only of one fund, but several. You have to pay the management fees for your share of the different funds which are part of the fund you have bought. But then the kicker comes: you also have to pay management fees for the fund you have bought. Did you follow? Your fund, whom you pay management fees to, buys shares in other funds. Where the fund you bought pays management fees. Which means your share automatically is worth less.
Now, I must stress, this is not a bad idea - in theory. If the growth of the fund is higher than other funds in the market plus the two fees plus some general percentage based on the expectation, then you are getting a good deal. You have managed to catch a number of growth funds with one throw. Nice.
As long as they are growing, and growing more than the growth of other funds plus the fees. Which means that if the funds in the funds are performing like the market, you are punished since you have to pay double fees. And if the market is not growing, you still have to pay the fees.
Of course, there are performance- based funds where you do not have to pay unless they gain in value. But they are not what the fund managers try to sell you. Despite funds charging small fees in terms of percentages, these management fees quickly gather up to quite a lot of money, even from a small fund. And with fumds of funds, they double.
This would not be so bad if the fund managers were actively looking after their funds. If you are reasonably smart and have a lot of money, it is not particularly difficult to make more money. Not even when the stock exchange drops. Maybe it is even easier then. But it beats me what fund managers do with their time. They are certainly not trying to make more money for their customers. They do desk research, they occasionally trade - but they donot seem to have any particular interest in investigating alternatives. Even if you invest in a Growth Fund, their holdings are companies like DuPont and IBM. Good and stalwart companies for sure, but hardly growth icons.
And this is not particularly unisual. Nor do you see the mutual fund managers change the holdings of their funds particularly often. For sure, deciding that you should not change anything may require quite a bit of research. Perhaps the fund managers are really sitting up late at night reading analyst reports. Perhaps they actually do create elaborate comparison charts to assist their decision processes. Perhaps they really visit the investor events of the companies and try to find out their future plans.
Somehow, I have a hard time believing it. Not that I know any fund managers, but I have been to a few investor events (when I was a journalist). And I do read the annual reports for the funds that I have, ande they hardly provide much evidence that the fund manager does a lot for the considerable salary they probably receive. The last few years have made it difficult for me to think about a fund managernin terms of low salaries.
So you may ask yourself: if you agree with me and you think you are not geting what you pay for when you pay the fund managers salary, how can paying the salaries of even more fund managers giving you more? No, I thought so. Me neither.