SAN FRANCISCO - Charles Schwab & Co. is seeking investment managers to provide mutual funds for its first fund of funds, which will specialize in international and emerging markets equities.
Schwab hired Cynthia Liu as a senior portfolio manager to run the fund and others in the future. She had been vice president and director of investment services for Jardine Fleming Holdings Ltd. in Hong Kong.
"Over the coming months and on an ongoing basis, she will be evaluating money managers and determining her investment strategy," said Bill Klipp, president and chief operating officer of Charles Schwab Investment Management Inc.
Why did Schwab start with an international fund of funds offering?
"No pun intended, international funds are sort of foreign to most U.S. consumers. We're looking for areas where we can add value for the smaller investor," Mr. Klipp said.
The fund in registration will have an initial investment minimum of $1,000 for retail accounts, $500 for individual retirement accounts.
A couple of more funds of funds will be registered by the end of the month, he said. The first will become effective in early September and begin taking assets in October.
Mr. Klipp said the fund-of-funds concept should attract defined contribution plan investors and will be offered to participants in Schwab's bundled 401(k) product.
The firm is careful to position the fund as an off-the-rack, one-size-fits-all type product so as not to pose a threat to the registered investment advisers that are key users of Schwab's mutual fund network and provide more customized services.
"There's a fair amount of hype and misinformation as it relates to our financial advice. We're trying to develop a packaged product solution - not a customized solution.
"There are a whole host of customers who either don't qualify or have the inclination to use investment advisers," Mr. Klipp said.
Called the Schwab OneSource Portfolio-International, at least 65% of the portfolio's mutual funds will be chosen from funds in Schwab OneSource, a no-transaction-fee mutual fund marketplace.
The funds "will not be actively traded, but the intent is not to buy a group of funds and sit on them forever."
Initially, the fund of funds may invest in as many as 25 mutual funds because of regulatory requirements, which Schwab is working to modify. While funds of funds offered within a single fund family may hold only three or four funds, under the Investment Co. Act of 1940, those that use outside funds must be significantly more diversified.
Schwab is working with the Securities and Exchange Commission to level the playing field with funds of funds of affiliated companies.
"A multifamily fund of funds brings much more value to the shareholder than affiliated funds of funds," Mr. Klipp said.
Legislation has been passed by the House and Senate - and is going to a conference committee - that modifies the rules. The legislation gives the SEC additional authority to provide exemptive relief for multifamily (unaffiliated) funds of funds, according to Mr. Klipp.