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.
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