Another Contender For Safe Money Emerges
Principal protection mutual funds are emerging as serious contenders for todays “safe money” dollars.
Such funds typically guarantee a return of original principal–sometimes minus certain charges–to the investor, even if the funds value plunges to zero. To get the guarantee, the investor needs to leave the money in the fund for a set period (typically five or 10 years).
Also called principal return funds, capital preservation funds, return of principal funds, and other appellations, these mutual funds might seem like new kids on the block to some investment advisors. But they are not new. Scudder Investments, New York City, brought out its first such fund in 1992; Salomon Smith Barney debuted one in the early 1990s, too; and Aetna Financial Services (now a part of ING) put one inside a variable annuity in 1996.
Despite these early entries, principal protection funds did not turn many heads in the financial rep community during the 1990s. Growth, tech and other hot funds were all the rage then. But today, with the stock market downturn over two years old, principal protection funds are starting to look more interesting. At some fund companies, theyre drawing significant sums.
For example, at ING Investments, Des Moines, Iowa, the principal protection fund “has been the best selling fund in our VAs since we started offering it in July 2001,” says William Lowe, senior vice president-wholesale distribution for INGs U.S. operations, Des Moines. The company also offers its principal protection fund as a retail fund.
The latest ING offering–the ING Principal Protection Fund IV–has already brought in $516 million, following its July 1, 2002 debut, he points out. (This offering closes on Sept. 30, 2002.) Furthermore, INGs previous Principal Protection Funds, each also having a three-month offering period, “have attracted nearly $2 billion in assets,” according to the company.
IDEX Mutual Funds, a St. Petersburg, Fla., member of Aegon/Transamerica, says its first such fund–the IDEX Principal Protected Stock Fund–drew $70 million during its three-month offering period, which closed June 27, 2002. (When the offering period closes, IDEX transfers the assets into the fund.)
So pleased is IDEX with the results that it is preparing a second offering.
Scudder, a member of Deutsche Asset Management and a veteran marketer in this field, says its current principal protection fund–the Target 2012 Fund–had assets of $73 million, as of Aug. 30, 2002. This is a “relatively high amount for a relatively new fund,” says Peter Jacobs, director-product management, noting that the company has six other funds in different stages of maturity.
(Note: This fund originally debuted, in February 1992, as the Scudder Retirement Fund Series III. After its original offering period, it closed to new purchases. Then, when it “matured” at the end of its 10-year period, it “reopened” on Feb. 15, 2002, under its new Target 2012 name, for another 10-year period.)
What is the appeal? “The funds make people feel good,” says Scudders Jacobs. Many investors are uncomfortable now, due to the volatile stock market, he explains. “This assures theyll get their money back,” if the market doesnt pick up during the investment period.
“Money goes somewhere,” explains Lowe of ING. “The lower fixed interest rates go, the more people will want to seek alternatives, and equities are often the alternative of choice. But when people are scared of equities, where are they going to go?” Increasingly, he answers, theyre going into principal protection funds.
Jacobs agrees. Protection is what reps are selling today, he says. “Theyre selling guarantees.”
He concedes that no Scudder investor has ever needed the guarantee. For example, if someone deposited $10,000 into Scudders principal protection fund in 1992, he says, that person would have had an account value of $20,316 by June 2002.
Even so, Jacobs continues, having that guarantee was very important to investors who went into that fund. In 1992, he explains, “another recession was on, and investors then wanted principal protection the same way many do today.”
“This is for the buyer who wants some equity exposure but who is afraid of volatile markets,” adds Lowe of ING. “Right now, thats the large majority of investors.”
And, when sold inside a VA, the fund serves as an alternative to low fixed annuity rates, Lowe says, noting that FA crediting rates have plummeted in recent months.
During a period when the stock market is rocking and rolling, “these funds will not compete with returns on traditional stock funds,” Lowe agrees. “But they do provide principal guarantees, and that is the solution that many investors want right now.”