Taking a tip from its variable annuities, Aetna Life and Annuity of Hartford, Conn., recently introduced a mutual fund that provides a guarantee of principal against a possible market downturn.
Aeltus Investment Management, also of Hartford, an independent subsidiary of Aetna, Inc., opened Aetna Principal Protection Fund I, a fund that allows investors to protect their principal while participating in both equity and fixed-income markets.
If investors hold the fund for at least five years, the fund guarantees that their account value on the last day of the five-year period will be no lower than their initial investment, less any sales charges or redemptions and cash distributions.
The offering period for the fund is two months, from Aug. 6 to Oct. 5, with the guarantee period running from Oct. 7, 1999 through Oct. 6, 2004.
"With the long bull market beginning to show some gray hair, the Aetna Principal Protection Fund I offers investors a vehicle to help them lock in some of their profits while continuing to take advantage of the potential upside to the stock market," Aeltus investment strategist Jim Griffin said in a prepared statement.
Aetna Principal Protection Fund I allocates assets according to prevailing market conditions. It adjusts its allocations freely between equities or fixed-income securities, or a combination of both.
"This fund is ideal for investors who want to participate in the stock and bond markets, while limiting the downside risk of investing," said Neil Kochen, the Aeltus portfolio strategist who developed the product. "As with all investments managed by Aeltus, we use a disciplined approach that eliminates the guesswork of market timing and manages risk."
If investors take withdrawals during the guarantee period, shares are redeemed at current market value, which may be more or less than their original investment.
The guarantee costs 33 basis points annually, Kochen said. It is being insured by MBIA, an insurance company based in Armonk, N.Y. The funds' total expenses come to about 150 basis points per year for A shares, he said.
The product has done well since it was introduced on Aug. 6, Kochen said. In the first day, he estimated that the fund took in about $5 million.
Aetna chose a five-year investment period after examining some assumptions about risk and return, according to Kochen. With a longer period, the risk of a market downturn declines significantly, enough to make the feature unnecessary, he said.
On the other hand, many experts believe a mutual fund is most vulnerable to the risk of market downturn during the first three to five years, Kochen said. But Aetna decided the three-year period was too risky. If the firm had opted for that period, it would have had to make more of its investments in fixed-income securities, thus cutting down an investor's potential gains.
To ensure the quality of the investments, the fund will invest only in stocks of the S&P 500 and in bonds with an AA- or better rating, Kochen added.
The Aetna Principal Protection Fund I is based on Aetna's GET E variable portfolio, a sub-account in its variable annuity product that also has a guarantee feature, according to Kochen. The GET E, which costs about 70 basis points, was introduced for investors who wanted to have a feature similar to a death benefit but didn't want to die to access it.
Over the years, other fund companies have had principal protection features, but most are now closed, said Julia O'Neal, a spokesperson for Aetna. Lipper Analytical Services of Summit, N.J., currently tracks 13 funds that offer principal protection.