RiverSource Disciplined Equity Fund
RiverSource Strategic Allocation Fund

Second Quarter 2008 Fund Update

Portfolio Managers:
Equities — Dimitris Bertsimas, Gina Mourtzinou and Alexander Sauer-Budge
Fixed income — Tom Murphy, Jamie Jackson and Scott Kirby

Below, the portfolio management teams discuss each Fund’s results and positioning for the second quarter of 2008.

How did each Fund perform for the period?

• The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. To obtain performance information current to the most recent month-end click here.

  RiverSource Disciplined Equity Fund’s Class A shares (without sales charge) declined 2.61% for the three months ended June 30, 2008. The Fund outperformed its benchmark, the Standard & Poor’s 500 Index (S&P 500 Index), which fell 2.73%. The Fund underperformed the Lipper Large-Cap Core Funds Index, representing the Fund’s peer group, which lost 1.44% for the same period.

  Average annual total returns for RiverSource Disciplined Equity Fund, which reflect Class A share performance at the maximum sales charge of 5.75% as of June 30, 2008 were 1-year: (20.23%), 3-years: 2.02%, 5-years: 5.72% and since inception (4/24/2003): 7.32%. The Class A share total expense ratio for the Fund is 1.05%.

• RiverSource Strategic Allocation Fund’s Class A shares (without sales charge) declined 1.54% for the three months ended June 30, 2008. The Fund outperformed the broad-based S&P 500 Index, an unmanaged group of large-cap stocks, which fell 2.73%, but underperformed the Lehman Brothers Aggregate Bond Index (Lehman Index), an unmanaged index representing U.S. taxable investment grade bonds, which dropped 1.02% for the quarter. The Fund also underperformed the Lipper Flexible Portfolio Funds Index, representing the Fund’s peer group, which gained 0.52%. The Blended Index, which is composed of 60% S&P 500 Index and 40% Lehman Index, declined 1.92% during the same time period.

  Average annual total returns for RiverSource Strategic Allocation Fund, which reflect Class A share performance at the maximum sales charge of 5.75% as of June 30, 2008 were 1-year: (16.47%), 3-years: 3.82%, 5-years: 7.07%, and 10-years: 3.06%. The Class A share total expense ratio for the Fund is 1.13%.

What factors most significantly affected each Fund's performance?

Global financial markets remained under pressure during the second quarter of 2008, as soaring energy prices, declining housing values, an ongoing credit crunch, higher unemployment and inflation worries weighed on investors. With this confluence of concerns, consumer confidence continued on its downward trend, recording its lowest level in 18 years. In response, the Federal Reserve System (the Fed) cut interest rates 25 basis points (0.25%) at the end of April, bringing the targeted federal funds rate to 2.00%. However, the Fed announced at its subsequent meetings during the quarter that it was holding the targeted federal funds rate steady. The statement was widely considered to signal an end to the Fed’s easing cycle. Against this backdrop, equity markets both in the United States and internationally, continued to experience great volatility. Indeed, stocks tumbled dramatically late in the quarter. The news was not much better in the fixed income market, where the painful de-leveraging process persisted throughout the quarter.

Stocks selected using our momentum and quality models for RiverSource Disciplined Equity Fund and the U.S. large-cap portion of RiverSource Strategic Allocation Fund contributed to performance during the second quarter. However, the value quantitative model underperformed. The momentum model took a strong lead, performing as designed to identify stocks that appeared to have improving prospects, and the quality model held up well during the period of lower equity markets as well. The value model was challenged primarily by exposure to financials and select consumer discretionary names. It is important to remember that the models we use take turns in leading performance over time, demonstrating the advantages of employing style diversification.

Following a specific, disciplined process, we do not make sector or industry bets based on economic or equity market outlooks. That said, the Funds’ quantitative models led to a bias toward quality stocks, which boosted results, during the period. At the same time, however, the Funds’ models positioned the equity portfolios toward the cheapest P/E stocks and toward the mega-cap, or largest cap stocks, both of which detracted from results. Stock selection within the mega-cap segment of the market, however, proved effective, contributing to the Funds’ results.

Because we use a bottom-up approach, it is not surprising that most of RiverSource Disciplined Equity Fund’s outperformance came from stock selection. Specifically, stock selection in the information technology, industrials and materials sectors helped most. Sector allocation overall also contributed positively to the Fund’s results during the quarter. Sizable allocations to energy, health care and materials and having only a modest exposure to industrials benefited the Fund’s results. Conversely, stock selection in health care and consumer discretionary detracted. Significant allocations to financials and consumer discretionary and having only small exposures to information technology and utilities hurt as well. In the large-cap equity portion of RiverSource Strategic Allocation Fund, stock selection and sector allocation similar to that in RiverSource Disciplined Equity Fund contributed to and detracted from performance in like fashion, but to varying degrees.

Individual positions that helped both Funds’ performance were Apple, Chevron, Occidental Petroleum, Schlumberger, Monsanto and Freeport-McMoRan. Stocks that detracted the most from both Funds’ results were Pfizer, Citigroup, Home Depot, Morgan Stanley and Fannie Mae.

The Funds’ largest holdings at the end of the period were Exxon Mobil, a momentum and quality choice; Chevron, selected by all three models; Pfizer, a value and quality model pick; Johnson & Johnson, a quality model pick; Occidental Petroleum, selected by the momentum and quality models; and Wal-Mart Stores, also a momentum and quality model selection. Apple, selected by the momentum model, was also one of RiverSource Disciplined Equity Fund’s largest holdings at the end of the quarter.

For RiverSource Strategic Allocation Fund, security selection was the primary reason for its outperformance vs. the blended index. The Fund’s security selection was effective in all asset classes, including small-cap and mid-cap equities, U.S. large-cap equities, international equities and U.S. and global fixed income.

Asset allocation also contributed to RiverSource Strategic Allocation Fund’s results for the quarter. The Fund’s modest exposure to U.S. fixed income detracted, but this was more than offset by the positive effect of the Fund’s allocations to small-cap and mid-cap equities and to emerging market equities.

Portfolio Holdings Mentioned (% of portfolio as of 6/30/08)

	RiverSource Disciplined Equity Fund	RiverSource Strategic Allocation Fund
Apple	3.45%	1.75%
Chevron	5.07%	2.88%
Citigroup	2.57%	1.32%
Exxon Mobil	4.90%	2.90%
Fannie Mae	0.84%	0.67%
Freeport-McMoRan	0.24%	0.33%
Home Depot	1.69%	0.97%
Johnson & Johnson	4.71%	2.22%
Monsanto	2.59%	1.36%
Morgan Stanley	1.16%	0.67%
Occidental Petroleum	2.91%	1.46%
Pfizer	4.42%	2.54%
Schlumberger	0.69%	0.78%
Wal-Mart Stores	2.51%	1.38%

 

What factors significantly affected the fixed income portion of RiverSource Strategic Allocation Fund during the quarter?

The Fund’s short duration relative to the Lehman Index helped performance, as interest rates rose sharply during the quarter. Rates rose as fears over the credit crisis ebbed. Also, the Fed signaled rising inflationary pressures were becoming a problem that it might need to respond to with interest rate hikes. Duration is a measure of the Fund’s sensitivity to changes in interest rates.

Within the Fund’s U.S. core bond holdings, sizable allocations to commercial mortgage-backed securities and residential mortgage securities helped results, as these sectors staged a recovery during the period from the prior quarter. Individual issue selection within these two sectors as well as in the investment grade corporate bond sector helped as well. An allocation to Treasury Inflation-Protected Securities (TIPS) also worked to the Fund’s benefit, as higher headline inflation boosted demand for an inflation hedge.

On the other hand, an allocation to non-U.S. dollar bonds, or bonds denominated in foreign currencies, hurt the Fund’s performance. The U.S. dollar rallied modestly vs. other major currencies during the quarter, and the value of the Fund’s foreign bond positions decreased, as foreign bond yields generally rose vs. U.S. bond yields. As the value of the U.S. dollar increases, the dollar value of foreign investments typically decreases, and vice versa.

During the quarter, we increased the Fund’s position in TIPS and non-U.S. dollar bonds, as the Fund’s asset allocation models increasingly favored these sectors. We believe both of these sectors offer an attractive hedge to ongoing weakness in the U.S. economy, the U.S. dollar and worldwide economic growth in general. We reduced the Fund’s position in commercial mortgage-backed securities as the sector rebounded, and we deployed the proceeds into investment grade corporate bonds and agency mortgage-backed securities. We slightly extended the Fund’s duration as interest rates climbed during the quarter.

At the end of the quarter, the Fund’s asset allocation models continued to favor higher quality non-Treasury sectors over U.S. Treasuries. We especially expect to focus on commercial mortgage-backed securities and non-agency mortgage-backed securities, which we believe continue to offer compelling value, with less of an exposure to agency securities. We maintained the Fund’s shorter-than-Lehman Index duration at the end of the quarter, as we believe that inflation concerns and modest economic growth will likely cause the Fed to hold off on further interest rate cuts for the near term. In a modest economic growth environment with inflation pressures, we believe rates should be materially higher.

More Information

View the fact sheet for:

• Disciplined Equity Fund
• Strategic Allocation Fund