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Mixing Growth Potential and Safety

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AIG SunAmerica thinks it has the right mix of growth potential and safety in its High Watermark Fund family, which locks in for the maturity date the highest value reached on any given day of a particular fund’s life, minus expenses and dividends.

The High Watermark Fund family was launched in June 2004, and offers three target maturities in five-year increments up to 2020. A unique feature of the funds’ design is the put option agreement with Prudential Financial, in which the insurer will make up any shortfall between fund net assets and the “high water value” on the fund’s maturity date. The 2010 maturity date fund, with half its exposure to the S&P, has returned a little more than 1% in 2005; the 2015 a little more than 3%; and the 2020, with the highest exposure to the S&P, a little under 4%.

Two years worth of analytical research and stress testing went into the funds, even a modeling of whether they could deliver on their promise of highest value reached returns if put under the same market conditions as prevailed in the Great Depression. The answer is yes, according to portfolio manager Juan Ocampo of Trajectory Asset Management LLC in New York. After the stress testing, Prudential felt comfortable guaranteeing the shortfall agreement.

The fund family is a good choice for a retirement portfolio, Ocampo notes, because of its diversified asset allocation and its risk profile. “It avoids reckless conservatism, plus [has] important exposure to equity,” he says. Indeed, appreciation on the funds’ zero-coupon government bonds is then invested into the S&P index futures market. With such market exposure, investors can get pretty high exposures to the equity market in the early years–from 50% to 85%–with built-in protections, according to Ocampo.

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