Do-it-yourself approach is coming to mutual funds

Do you feel like you can pick stocks better than whoever is managing your mutual fund? Well, if you think so, there are firms willing to give you a shot at creating and managing your own fund.

The tools allow investors to select multiple stocks to be held and managed as one account, somewhat like a mutual fund. That power to choose the stocks gives investors much more control over their investments than they would have with a mutual fund, which is run by a manager.

But observers say these products are not right for all investors, especially those who don't have the time or ability to do stock research and effectively monitor the investment.

"It's a niche. They've created a product that appeals to a very small segment of individual investors, and that is people who enjoy picking the stocks and have the time. And I would say most people don't have the ability and don't have the time," said Brian Boyle, investment manager and president of Boyle Capital in West Des Moines, Iowa.

Physicians are among those investors who might lack adequate time to take advantage of these tools, Boyle said. But there could be some "do-it-yourself" types whose needs would be served by the products.

At least two companies -- FolioFN and Fidelity Investments -- are offering this type of investment, which has emerged in the last five years. The offerings are somewhat different, with FolioFN's "folios" and Fidelity's "basket trading."

Folios are baskets of securities, with each basket containing up to 50 items. Holdings might include stocks, mutual funds, exchange-traded funds or any individual securities. Investors can add or subtract securities from the baskets or change the value of the investment before or after they are established. Securities can be bought in whole or fractional shares.

FolioFN also created roughly 100 "ready-to-go" folios that contain about 20 to 30 predesignated stocks that track an industry, an index or a theme. Investors who are reluctant to build their folios completely from scratch can use these as templates to get started and then make changes as they see fit.

Fidelity's basket trading also allows investors to select up to 50 stocks to be traded, monitored and managed in a basket as one entity. It works a little differently because it also allows investors to create "watch baskets" to track the performance of a basket before actually purchasing it.

Paul Graham, senior vice president of Fidelity Brokerage Services, said the baskets are good tools for people who want to organize and monitor the performance of a group of stocks. "They also provide for an integrated look at your portfolio," he said.

Performance varies

Performance varies widely depending on which stocks have been selected. Steven Wallman, founder and chief executive of Vienna, Va.-based FolioFN, said some have been hot and some have been dogs.

"That goes to the wisdom of the fact that no one knows in advance which will be winners and which will be losers," he said. "But the bulk of the investors we have are reasonably sophisticated and reasonably educated investors."

Some observers, however, have questioned whether it is wise for investors to take on the risk of selecting their own stocks when they could be using a mutual fund created by a professional who is paid to understand stocks.

"To expect someone who doesn't do that full time to outperform someone who does, you're probably going to take on more risk," Boyle said. "But you may have more fun."

"I wouldn't recommend that people put their retirement savings in there and try to manage it themselves," he added. "But it may be a good play money type of thing."

John Price, president of Conscious Investing USA, a software company for investors based in Fairfield, Iowa, said many investors had been hurt by low-performing funds, so they might be more inclined to take on the risk and responsibility of choosing their own stocks.

"A lot of people would like to have more control over their investing. They enjoy doing their own research, they enjoy not being locked into the weighting of the funds," he said.

Despite that appeal, this sector has not caught fire in the investment world. Wallman said the idea is still so new that it will take more time for it to really take off. Also, he said investors might have had trouble understanding the concept.

"Folio investing is not the simplest of all things. You have to be a little smart or sophisticated to take advantage," Wallman said.

Graham said the technology used to support this type of investment is fairly expensive, which might explain why there haven't been more firms pursuing the idea.

He said Fidelity had been pleased with the growth it had seen in basket trading, although he couldn't provide figures.

The fees for these products might be in line with what investors would accrue through other brokerage services. Costs are kept down because the transactions are amalgamated, Price said. "It's six of one, half-dozen of the other," he said.

At FolioFN, the base fee for one folio is $199 per year for up to 50 securities and 200 trades per month. But if the investor doesn't trade very often, the value is less significant. At Fidelity, there is no base fee for basket trading, but each trade is charged based on the firm's regular commission schedule of either $19.95, $14.95 or $8 per trade.

Both firms say their products make record-keeping easier than it might be with individual stock trades because the baskets or folios are treated as single accounts. And both say tax implications are as flexible, if not more, than other securities investments.

So the question of whether to put money into a "do-it-yourself" fund could end up coming down to, in the words of Dirty Harry, do you feel lucky?