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.

Table 1 below compares the average returns for funds of funds with those of the S&P 500-stock index for the one-, three-, and five-year periods through August. While the 10.78% average one-year return trailed the S&P’s 11.45% gain during that time, the group managed to outperform the S&P 500 in both the three- and five-year periods.

We screened for the top ten performers, as listed in Table 2 below. We looked for funds which outperformed the S&P 500 in each of the one-, three-, and five-year periods through last month. The funds are ranked in order of one-year returns.

The expense ratios of the ten funds in Table 2 compare favorably with all-cap funds and equity funds overall. All but two funds of funds in our screen have expense ratios of less than 1.0%: T Rowe Price Spectrum Funds International Fund (PSILX) at 1.05%, and WM Strategic Growth Portfolio/A (SACAX) at 1.13%. Overall, equity funds of funds have an average expense ratio of 0.94%.

All-cap funds have an average expense ratio of 1.65%, while domestic equity funds have an average expense ratio of 1.53%.

Table 1

Returns Through 8/31/04 (%)
One-Year

Three-Year Annualized

Five-Year Annualized

Funds of Funds Average +10.78%

+1.93%

+0.64%

S&P 500-Stock Index +11.45%

+0.8%

-2.06%

Returns Through 8/31/04 (%)

One-Year

Three-Year Annualized

Five-Year Annualized

Expense Ratio

S&P Star Ranking

Vanguard Total International Stock Index (VGTSX)

+22.33%

+5.29%

-0.60%

0.36%

4

T Rowe Price Spectrum Fds International Fund (PSILX)

+18.16%

+3.65%

-0.58%

1.05%

3

Goldman Sachs Aggressive Growth Strategy/A (GAPAX)

+17.99%

+4.82%

+0.43%

0.6%

4

Goldman Sachs Growth Strategy/A (GGSAX)

+17.12%

+4.76%

+1.24%

0.6%

5

Lord Abbett Alpha Fund/A (ALFAX)

+13.98%

+3.85%

+1.61%

0.39%

3

Frank Russell LifePoints: Eq Aggressive Stgy/E (RELEX)

+13.49%

+3.05%

+0.18%

0.25%

5

Schwab MarketTrack All Equity Portfolio (SWEGX)

+13.09%

+2.00%

-0.45%

0.5%

4

T Rowe Price Spectrum Fds Growth Fund (PRSGX)

+12.97%

+3.57%

+2.56%

0.86%

3

Vanguard LifeStrategy Growth (VASGX)

+12.65%

+3.49%

+1.00%

0.28%

4

WM Strategic Growth Portfolio/A (SACAX)

+12.59%

+1.41%

+3.30%

1.13%

3

S&P 500-Stock Index

+11.45%

+0.80%

-2.06%

N/A

N/A

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.