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Portfolio > Mutual Funds

Guaranteed Funds Face Skepticism In U.S.

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NU Online News Service, March 5, 10:15 a.m. – U.S. mutual fund companies and their producers may have to work overtime to persuade the typical investor to pay for a guarantee of principal.

Despite two years of stock market volatility, American fund experts are still skeptical about the guarantee concept, even for the most cautious investors.

“If you’re that risk-averse, you probably shouldn’t be in an equity fund,” says Brian Portnoy, a fund analyst in Morningstar Inc.’s Chicago office.

“Guaranteed” mutual funds and “principal-protected” funds are popular outside the United States, in countries where older investors have vivid memories of financial and political turmoil.

In Hong Kong, for example, guaranteed funds accounted for about 44% of new mutual fund sales during the first 10 months of 2001, according to a January report carried by the Dow Jones Newswire.

DWS Investment S.A., Luxembourg, an affiliate of Deutsche Bank, has estimated that guaranteed funds account for about 20% of its mutual fund assets.

When Morningstar polled executives at 43 large European fund companies in late 2001, it found that five executives expected guaranteed funds to attract more money than any other type of fund over the next 12 months.

In the United States, insurers make investment guarantees a key selling point for variable annuity contracts, but fund companies have been trying to sell guaranteed mutual funds outside VA wrappers for years without getting much attention.

The U.S. fund arm of ING Groep N.V., Amsterdam, began trying to change that record a year ago, when it introduced the ING Principal Protection Funds series.

Each fund in the series opens to investors for an offering period that lasts a few weeks. Shortly after the offering period ends, a five-year guarantee period begins. ING guarantees a return of the initial principal, minus sales charges and fund expenses, for investors who keep all assets and all distributions in the fund for the full five-year guarantee period.

The first two funds in the series have attracted $1.3 billion in assets, ING says.

The offering period for the third fund ends May 30.

ING appears to have set expense ratios high enough that it and the insurance company backing the guarantees, a unit of MBIA Inc., Armonk, N.Y., should have an easy time making good on the guarantees, even if the market does horribly, Portnoy says.

But “it’s more or less a sucker’s bet,” Portnoy says. “I don’t think you’re going to find any five-year period when the S&P 500′s gone down.”

An investor would probably be better off putting money in an index fund with a low expense ratio, Portnoy argues.


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