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Is there ever a benign explanation for allocating a large percentage of assets to an index fund during FoF portfolio construction?
From the manager's point of view, the perks are obvious, especially in a closed architecture setting where the FoF points to other funds under the manager. However, from an investor's point of view, stacking fees across multiple wrappers just to get (mostly) the performance of the market seems a bit undesirable.
"Ever" is very broad-- you can almost always find some case where a structure makes sense.
The simplest option that pops to mind is a target date retirement fund. Ideally, what you're paying for there is mostly someone to manage your asset allocation so that you get the returns from long-term investment in stocks but get more conservative as you get closer to retirement so that you can better weather a downturn just before or just after your retirement date. I'd be quite happy to have a target date retirement fund that invested in half a dozen index funds with reasonable adjustments for age. And, presumably, such a structure would be relatively inexpensive (both in terms of the fees from the individual funds and in terms of the fees from the wrapper).
Of course, that doesn't mean that every such construction is sensible. If the wrapper is charging you a large amount of fees to buy and hold some index funds or if they're putting money in index funds that themselves have large expense ratios, that's obviously a bad deal.
We'll need more information but as an example imagine a pure alpha long/short equity fund. The easiest/cheapest way to get exposure to the market is to buy/sell SPX futures or shares of SPY to neutralize the beta from your stock positions. We can come up with other strategies where it makes sense to use an ETF or other fund to establish a core position, tactical allocation, or hedge.
