Aeltus Investment Management of Hartford, Conn., having had success with earlier, similar products, has begun selling the Aetna Index Plus Protection Fund, a fund with guaranteed principal. This is the fifth such fund Aeltus has begun selling under the Aetna Principal Protection Funds brand since October of last year.
The new fund is structured like the previous four. There is a short offering period, from Oct. 2 to Nov. 29, when consumers can invest. Following the offering phase is a five- year-guaranteed period, which starts on Dec. 1 and ends Nov. 20, 2005. If a customer remains invested in the fund throughout the guarantee period, his principal is guaranteed, according to the fund prospectus. A customer can remove money from the account at any time, but that will lower the guarantee amount, according to the prospectus. The minimum investment is $5000 and nothing can be added after the offering period ends.
"We decided to offer a fifth mutual fund with a guarantee of principal due to the success of our first four offerings," said Neil Kochen, Aeltus portfolio strategist. "Each of the first four have met with very good distributor and investor demand." The combined sales for the first four Aetna Principal Protection Funds were more than $450 million, according to the company.
"As we anticipated, many investors continue to limit their downside risk in these volatile market conditions, but want to continue to participate in the bond and stock market," said Kochen. "We think there will be continued interest in a mutual fund with a guarantee of principal."
High market volatility is the main reason that Aeltus is offering these types of funds, according to Kochen. Because of the volatility, "investors are revising some of their expectations of the market," he said.
Funds with guaranteed principal are rare, industry consultants said.
"There are a few isolated cases," said Jim Folwell, a consultant with Cerulli Associates of Boston. "We are seeing more ways of combining insurance and funds, but usually if someone wants that type of investment, they'll look towards a variable annuity or something like that."
A more common form of fund insurance is a fund with a death benefit. In February, for example, Putnam Investments of Boston started offering insurance on all of its funds such that a death benefit of either the fund's maximum anniversary value or a five-percent compound annual increase on the initial investment, is paid to the fund holder's beneficiaries (MFMN 2/14/00). Prudential of Newark, N.J., American Skandia Life Assurance Society of Shelton, Conn. and SunAmerica of Los Angeles offer these type of funds as well.
Aeltus' principal protection funds are different than those with a death benefit, however.
"There are few funds that have what we like to call a living benefit,'" said Kochen. "I won't say we're the only ones, but given the feedback we've had with these, I would think there aren't a lot of funds that are configured like ours."
The new fund is more expensive than Aeltus' non-insured funds. The difference is due to the guarantee fee. The class A shares (Class B shares are also an option) are offered at 150 basis points annually, including a 33 basis point guarantee fee, according to the fund prospectus. Aeltus' other class A shares average 118.75 basis points, according to the company's September prospectus.
"When you consider the total fee structure, we feel this is a competitively priced product," said Kochen.
Like Aeltus' other principal protection funds, the Aetna Index Plus Protection Fund is not a balanced fund so there is no predetermined allocation between equity and fixed-income securities, according to a company. The fund can adjust the allocation in either direction based on market conditions during the guarantee period.
This new fund differs from the other four in what happens after the guarantee period is over. Instead of being liquidated at that time, the fund will enter the Index Plus Large Cap' period, during which all fixed income securities in the portfolio will be liquidated and additional equities will be purchased, according to the fund prospectus. During this period, the guarantee no longer applies. However, shareholders can make additional investments and withdrawals.
This new benefit has been added in response to consumer demand, said Kochen.
"The primary reason is that we were getting feedback from distributors and even some investors that the five-year maturity date may present our investors with some unfortunate tax burdens," said Kochen. "With this fund, investors can take investments out or leave them in after the guarantee period which can help them manage tax liabilities."
The first four funds, called Aetna Principal Protection Fund I, II, III, and IV, have not had spectacular performance, but have had positive returns. They have had an average return of 3.31 percent as of Sept. 30, according to the company.
"This is a feature that hasn't been widely offered," said Folwell. "It may just not have taken off because of a lack of awareness about the option. Is it going to overtake the industry? Probably not. But evidently [Aeltus] is having success with it and so why not offer another?"