Ten Funds of Funds With Low Expenses, Competitive Returns

Sept. 27, 2004 — Equity funds of funds can provide attractive returns at a reasonable price, along with other benefits. The first is greater diversification than in a conventional mutual fund. A fund of funds can further diversify by investing in several different funds or across investment styles.

Second, it is easier to monitor this diversification in a fund of funds. Keeping track of the statements of several individual funds is more cumbersome than examining the combined statement of a fund of funds.

Third, a fund of funds can invest in institutional funds not ordinarily available to individual investors. Finally, investing in several conventional funds may require a greater initial sum since most funds have an investment minimum.

“A fund of funds approach provides an investor with a complete investment strategy in one fund,” says Rosanne Pane, Standard & Poor’s mutual fund strategist. “Many sponsors offer a series of funds of funds that range from conservative to aggressive and include periodic rebalancing to maintain a consistent return/risk profile. The individual investor can make one fund decision and benefit from professional management selecting the underlying funds and providing automatic rebalancing.”

As a category, funds of funds are relatively new. Of the 167 funds of funds in the S&P database, 118 have operated for at least three years, while 76 have been around for at least five years.