The use of a legendary name in the investment business hasn't translated into legendary returns for this three-headed fund.

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Sir John Templeton, a true investment legend, died recently at age 95, leaving behind a legacy of sound strategy and generous philanthropy.

The man earned his legend by being willing to buy through a condition he called “maximum pessimism” — the point where there are no buyers left in the market.

At that point, of course, Templeton the arch-contrarian became a buyer; his most famous purchase may have been in 1939, when he put $100 into every stock on the New York Stock Exchange that was trading for less than a buck a share. The market was still recovering from the Great Depression, and buyers were scarce. In time, Templeton made a killing.

Templeton founded his own investment firm in 1940 and started the Templeton Growth Fund in 1954. One of the first global stock funds, Templeton Growth, would have turned a $10,000 investment in 1954 into $2 million by 1992, when the legend sold his business to fund-giant Franklin Resources.

If you wanted to honor Templeton’s legacy of great investing, you might think about Franklin Templeton Founding Allocation, a mutual fund that holds three of the company’s best-known issues, including Templeton Growth.

And if that’s what you did, you would find out that the fund is much less than the sum of its famous parts, and not entirely in keeping with the thinking that made Templeton a legend. That’s why Franklin Templeton Founding Allocation is the Stupid Investment of the Week.

Stupid Investment of the Week showcases the traits and conditions that make a security less than ideal for the average investor, in the hope that spotlighting trouble in one case will make danger easier to recognize elsewhere. While obviously not a purchase recommendation, neither is the column meant to be an automatic sell signal, as there are times when dumping a worrisome investment simply compounds the problems.

That’s particularly true for a fund like Founding Allocation, which is built to be a long-term, core holding, and which has more than $15 billion in assets spread across several share classes.

The fund’s strategy is simple: It divides its money equally between three sister funds, and maintains a static asset allocation so that each fund with a split of the assets holds one-third of its cash.

On the surface, it’s not a bad idea.

Mutual Shares is a longtime large-cap value performer. For years it was run by veteran Michael Price and later David Winters, both considered value investing “gurus,” which apparently puts them a step behind Templeton’s “legend” status, but has been good enough to pay off for shareholders. The current management team has been in place and in charge for about three years, and performance has remained in the top one-third of its peer group.

Then there’s Templeton Growth, the world stock fund that may have helped Templeton form his legend, but which hasn’t been the great man’s fund — or had his performance — for decades. Over the last five years, this fund has been in the bottom 20 percent of its peer group, according to investment researcher Morningstar.

Finally, there’s Franklin Income, which has been run by the same manager, Charles Johnson — Franklin’s chairman — for more than five decades, and which is one of the most consistent performers over that time, regularly topping the long-term charts in its Morningstar peer group.

Individually, these funds look pretty good. The problem is in the combination. Instead of getting three low-cost issues, the extra layer of expenses — apparently necessary to maintain the even split between the three funds — raises costs and reduces performance. Shareholders pay the expenses of the underlying funds as well as that of the overarching fund.

Never mind that plenty of fund companies don’t charge additional management fees for their in-house fund-of-funds — or that simple consumer logic would suggest you’d get a three-for-one discount for buying multiple funds from the same house — Franklin Templeton Founding Allocation has a total expense ratio of more than 1.1 percent.

That goes a long way to explaining how mixing a five-star fund (Income) with two three-star funds produces an issue that musters just two stars from Morningstar. That’s also how you combine three funds which receive Lipper’s highest marks for preservation of capital into a fund that gets the research firm’s lowest-possible rating in that same key category.

“This is an easy choice to make, because it provides access to three different funds with decent to strong histories, but once you look further, you recognize that it would not be hard to find more appropriate and less expensive choices,” said Gregg Wolper, a Morningstar fund analyst.

“I just don’t see why someone wouldn’t just do this themselves, possibly picking better funds and certainly keeping their money in less-expensive funds than [Founding Allocation],” he said. “You’re talking about three funds, keeping the dollars even … it’s just not that hard.”

Some of the discrepancy in ratings between the underlying funds and Founding Allocation is that each issue gets rated in a different asset class.

Still, the underlying logic of paying up for the convenience of holding equal weights in three big funds is pretty hard to stomach at a time when the market makes you nervous. If an investor were putting together a fund that looked for the best of breed in each of the three asset classes, they almost certainly would come away with no more than two of these Franklin Templeton funds in the portfolio. They’d be happier — and have a lower cost portfolio — doing this themselves.

“The fund honors the history of Franklin Templeton with three of its best funds over time, but it may not do the same for current investors,” said Jeff Tjornehoj, senior research analyst for Lipper. “It’s not Sir John’s fund or fund company any more.”

When a fund company offers you a package deal, but doesn’t give you a great deal on the package, it’s time for you to exercise maximum pessimism. The fund — especially in the case of Founding Allocation — won’t lead you to the poor house, but there’s not much point to buying it when you can do something better on your own.

Copyright, 2008, MarketWatch

Chuck Jaffe is senior columnist for MarketWatch. He does not own or hold short positions in any securities covered by Stupid Investment of the Week. If you have a suggestion for Chuck Jaffe’s Stupid Investment of the Week or a comment about this week’s column, you can reach him at or Box 70, Cohasset, MA 02025-0070.