New Funds Offer Principle Guarantee
FOR individuals who find investing in common stocks too risky, how about an equity mutual fund that guarantees repayment of principle after a period of time - say 10 years? Not only that, but also guarantees payment of the up-front sales charges?
There are at least three mutual funds that now have such insurance characteristics. Two are standard equity funds: the Kemper Retirement Fund, and the Lord Abbett Equity Series. The third, MainStay Equity Index Fund, is a stock index fund. Its portfolio is structured to mirror a popular market benchmark, the Standard & Poor's 500 Composite Stock Price Index.
``There have been lots of mutual funds over the years designed to achieve many specific goals, such as products based on obtaining high yields. But as we studied consumer needs we realized that there was much greater need for retirement planning today. That's why we came up with the Kemper Retirement Fund,'' says Steve Radis, a Kemper spokesman in Chicago.
In regard to the security of principle, the guaranteed funds resemble a fixed income investment instrument, such as a certificate of deposit. Of course, the amount of future earnings on principle can't be foreseen and isn't guaranteed. Even the principle, though insured against nominal losses, is not insured against inflation. In the case of these three funds, the guarantee is for 10 years. Initial sales costs are also covered by the guarantee. At the end of the 10-year period, if the investor's shares are worth less than the amount guaranteed, the fund writes a check for the difference. ``About the worst thing that can happen [to an investor] is that nothing happens'' - in other words, the investor breaks even, says Dan Carper, national sales manager and a partner with Lord Abbett.
At the end of the insured period, the investor is again fully subject to market risk, as with other equity funds.
The funds are series offerings, that is, open to investors for a limited period of time. Two are now closed to new investors, at least for the moment. The Kemper Retirement Fund was first opened back in February, followed by a second, more recent offering. The minimum investment: $1,000. At the moment, this fund has about 35 percent of its assets invested in stocks, 54 percent invested in bonds, and 11 percent in short-term money-market instruments.
The Lord Abbett fund, which opened in April and closed May 1, has assets of slightly under $90 million. Between 80 and 90 percent of the assets are invested in common stocks. Lord Abbett is considering a new offering sometime in the future.
The newest of the three funds, the MainStay Equity Index Fund, is guaranteed by NYLIFE Inc., a wholly-owned subsidiary of New York Life Insurance Company. NYLIFE has assets in excess of $900 million. This fund will accept checks and applications up to Dec. 19, 1990. However, it is reserving the right to either reopen the series, or have a separate offering at some point down the road, says Frank Mistero, a marketing vice president with NYLIFE Securities Inc.
Fund officials insist the arrangement is not all gain for the investment company. ``The problem is that we can't sell new offerings [on a closed series] but we have to redeem shares,'' says Mr. Carper of Lord Abbett. Processing redemptions, of course, costs a fund money.
Why did NYLIFE chose to go with an insured index fund, and not just an insured equity fund?
According to Donald Mesler, managing director of the NYLIFE subsidiary that actually manages the fund, there is no better way to invest for the long-haul than by linking investments to the main trend of the market. Mr. Mesler notes that since 1926, when Standard & Poor's began its index, the S&P has produced a compounded annual return of 10.3 percent, considerably outperforming most alternative investments. In those years, by the way, there are only two ten-year periods where an investor would have lost a portion of his principle.