July 17, 2000
With the volatility of the equity market showing no sign of lessening, some fund companies are taking steps to protect investors from that volatility.
At least two mutual fund advisers have, in recent weeks, introduced products aimed at protecting the initial investment investors make. These products aim to ensure that when investors redeem them, they get back at least as much as they originally invested.
On June 13, ING Funds of Philadelphia introduced a novel unit investment trust product, the ING SecurityNet Portfolio, that invests 50 percent in the ING Internet Fund and 50 percent in U.S. Government zero-coupon securities. The UIT portfolio runs for a term of 12 years.
The combined product offers investors the opportunity to participate in the Internet sector while the fixed-income Treasury securities portion stabilizes the trust's value, according to ING.
"Those who stay the course will get back their principal investment, as of the date of deposit, providing that they hold their unit until the Trust terminates," said John Pileggi, president and CEO of ING Funds, in a statement released with the launch of the ING SecurityNet Portfolio.
On July 6, Aeltus Investment Management of Hartford, Conn., the asset management arm of Aetna, the insurance company, also introduced a product designed to protect investors from losing their original investment. The product, the Aetna Principal Protection Fund IV, is a flexible balanced mutual fund
The fund invests in a variety of S&P 500 companies and fixed-income securities. The fund's managers can shift the allocation between equity and fixed-income securities, even shifting 100 percent of fund assets into equities or fixed-income securities.
But the Aeltus Principal Protection Fund IV provides an extra level of insurance. MBIA Insurance Company of Armonk, N.Y. has underwritten an insurance wrapper for the fund that will protect investors from losing money on their investment.
Under the arrangement, the fund's investors are ensured that their account value on the fund's predetermined expiration date of Sept. 6, 2005, will not be lower than their initial investment, minus any applicable sales charges, redemptions or cash distributions. The cost to the fund for this insurance wrapper is 0.33 percent, said Neil Kochen, chief equity officer and Aeltus portfolio strategist.
The Aetna Principal Protection Fund IV is being made available on a pre-subscription basis from July 6 through Sept. 6. The assets received through Sept. 6 will be pooled and temporarily invested in money market securities, said Kochen. On Sept. 7, the combined assets plus any earnings will be invested in the fund.
This fund is nearly a clone of the Principal Protection Funds I, II and III that Aeltus has launched since August 1999. But their portfolios differ slightly because they were introduced at different times. The first three Aeltus insured funds have attracted a total of $400 million, said Kochen.
There's a large target market for these insured funds, according to Kochen.
"There are those who have made tremendous gains from the market, and those who want to remain in the equity markets and participate in the upside of the equity market while not subjecting those gains to risk," he said.
The insured investment program is not a new concept for Aeltus. Aeltus has been selling a variable annuity with guaranteed return of principal since 1984, according to Kochen.
While there have been some recent successes with insured equity mutual funds, insured investments have more often been found in the variable annuity marketplace, industry analysts said.
"The mutual fund industry has been losing assets to variable annuity products for a number of years," said Gene Muenchau, national vice president for mutual funds and variable annuities at Fortis Financial Group in Woodbury, Minn. "In order to maintain a competitive edge, and to provide clients with one of the more attractive benefits of a variable annuity, mutual fund companies have begun to mimic VAs by guaranteeing no loss [of principal]."