Investors Seek Magic Mix of Money-Making Mutual Funds : Finance: Multi-fund portfolios with results that justify the effort remain frustratingly elusive.

Undeterred by a long history of scandals, misfires and other disappointments, people in the money-management business keep trying to invent a truly successful mutual fund of mutual funds.

The idea dates back at least as far as the 1960s, when a maverick financier named Bernard Cornfeld built a multibillion-dollar offshore empire, which ultimately collapsed, around a mutual fund investing in the shares of other funds.

Cornfeld, who died Feb. 27, became an enduring symbol of financial promises unkept.

Over the years since his heyday, numerous other individuals and organizations have set up their variations on the multi-fund principle, aimed at providing investors with a conveniently packaged portfolio of fund investments.

“In theory, they offer expertise in fund selection and market timing,” says fund industry expert Sheldon Jacobs in his “Handbook For No-Load Fund Investors.” “In practice, the funds have not been notably successful.”

More than a dozen funds of funds operate today, some of them following very conservative approaches and others taking a more aggressive line, seeking to move back and forth between funds and cash as the markets swing up and down.

The newest competitor in the field is Robert Markman, an Edina, Minn., investment adviser who manages more than $300 million for private clients in mutual funds.

A few weeks ago he launched the Markman Multifund Trust, a series of three portfolios seeking aggressive, moderate and conservative growth.

“I want to show the industry that a fund of funds can work,” Markman declares.

One built-in problem that multi-funds have encountered is the extra layer of fees and expenses they create. It only stands to reason that outstanding results are going to be hard to achieve when one collects fees for expenses and management of a portfolio of funds that themselves incur expenses and management fees.

A second big challenge: putting together a portfolio of funds that consistently beats the stock market averages.

It is tough to “add value” this way, many analysts say, because a diversified portfolio of diversified funds tends to take on increasing characteristics of an index fund.

True index funds, which are set up to duplicate the performance of a market index such as Standard & Poor’s 500-stock composite, can operate with only bare-bones expenses. Thus they have a built-in edge on any diversified managed fund that parallels the behavior of the overall market.

Multi-funds started in the past 10 years by a couple of big fund groups have dealt with the cost problem by collecting no fees on their own behalf.

The Vanguard Star Fund, the biggest of these, invests in a package of other funds in the Vanguard Group in Valley Forge, Pa. It had assets approaching $4 billion at last report.

“Overall, the fund’s approach has produced average returns and below-average risk,” says Morningstar Mutual Funds.

T. Rowe Price Associates in Baltimore, meanwhile, has attracted about $1.5 billion to its Spectrum Growth and Spectrum Income funds, each of which invests in about half a dozen other Price funds.

But Markman says he thinks “artificially limiting choices” to funds in a single family “must inevitably impact negatively on results.”

“Our solution is to access virtually the entire fund universe to attempt to construct the best portfolio possible,” he says.

“There will be few, if any, limits on what we can look at: no-loads, of course; load funds that we’ll be able to buy at no load because of our size; and funds normally closed to investors.”

On the cost issue, Markman says his funds will limit expenses to no more than .95% of assets per year.

Even at that lower-than-typical level, however, it remains to be demonstrated whether he can achieve bottom-line results that will justify the effort.

A clear verdict can be expected with the passage of time, as the Markman multi-funds accumulate investment results that can be compared with the returns achieved by any good stock index fund.