Fund guarantees yield won't evaporate
BY TERRY SAVAGE Sun-Times Columnist Aug 24, 2006
Updated: May 3, 2013 12:14PM
More than half of mutual fund managers fail to beat the market. The latest results show that the S&P 500 index has outperformed 58.2 percent of large cap funds, while the S&P Midcap 600 Index has outperformed 61.3 percent of mid-cap funds. The S&P Small Cap 600 Index beat 68.1 percent of small cap funds!
Those performance levels are enough to paralyze you with fear, or make you think that money market funds or stable value funds are the safest place to be.
But for those with 10 years or more to go in the work force, and probably an additional 25-to-30 years to live in retirement, those "safe" choices are probably the most risky decisions you can make. Even moderate inflation will erode the interest you earn, and your money certainly isn't working for you in any meaningful way unless you include equity (stock) investments.
Capital guarantee fundsRecognizing that aspect of human nature called "reckless conservatism," Prudential Retirement has just launched a series of Capital Guarantee Funds designed with an incredible promise: If you hold your fund until its maturity date, you will receive the highest daily value of your fund investment during that holding period -- even if the market subsequently declines!
Put it another way: If the net value of your fund rises for a few years, but then is devastated by a bear market just before the fund matures (in a year designated to be closest to your planned retirement), you'll still get the full value of the fund at its highest point in the cycle.
Very simply, this investment takes away the risk -- and the fear -- of loss!
Three huge questions jump immediately to mind:
*How can they do it? It's done through sophisticated money management and an even more sophisticated use of hedging techniques. Depending on maturity date, the fund units invest in equity and debt securities, as well as using Treasury bills, zero coupon government bonds, as well as stock index futures and options to manage risk and maintain the guarantee.
*Who guarantees this promise? The ending-value promise is backed by the full faith and creditworthiness of the issuing company, Prudential Retirement Insurance and Annuity Co., a Prudential Financial company, with assets of more than half a trillion dollars.
*How much does it cost? The annual cost is a surprisingly moderate 117-127 basis points, depending on the size and complexity of the retirement plan that includes these Prudential funds. That is less than many mutual funds charge with no guarantees!
Here's how they work: A company plan offers four different funds with target maturity dates of 2010, 2015, 2020 and 2025. Each is structured as a mix of equity and fixed-income investments, with shorter term funds managed more conservatively.
Plan participants may choose one or more of the units for their investments, giving a more flexible approach to retirement investing. The units can be purchased at any time, based on their net unit value that day.
The funds are liquid , meaning you can also sell out any day at the current net unit value. But the idea is to hold them to maturity. If you sell before the maturity date of your fund, you void the guarantee that it will be worth its highest lifetime value.
Actual fund management is done by Trajectory Asset Management, a registered investment adviser that specializes in quantitative investment strategies.
These products are exclusively available in company retirement plans offered by Prudential Retirement. But Trajectory Asset Management has created a similar series of products called the High Watermark Funds being offered by AIG/SunAmerica Mutual Funds. For more information and a prospectus go to www.SunAmericafunds.com.
There's a downsideAnalyst Eric Jacobson of Morningstar notes that firms including Merrill Lynch, Oppenheimer and AIG have previously offered various sorts of guarantee promises on funds, and warns that if the fund invests too cautiously, it's not worth paying for the guarantee. Prudential says its new series "generates up market participation with downside protection."
They'll be a worthwhile investment if they help investors understand the importance of equity returns in their retirement investments and give them courage to access those returns. And that's The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.