The Lord Abbett Equity Fund, a ten-year-old insured mutual fund with $55 million in assets, was merged out of existence on May 31, according to a proxy filing May 25. Shareholders voted to merge the Lord Abbett Equity Fund into the Lord Abbett Large Cap Growth Fund, a similar fund, on May 26.
The Lord Abbett Equity Fund was the only fund managed by Lord Abbet & Co. that was insured, said Michael B. McLaughlin, partner and director of marketing with Lord Abbett & Co. which relocated its offices to Jersey City, N.J. in January. The insurance, underwritten by Financial Securities Assurance of New York, was added to guarantee shareholders that their share value would never fall below $10.
The fund was introduced in June 1990 with a 10-year insurance policy for the fund shares. To assure that coverage, investors were required to invest for the entire 10-year term and reinvest all dividends and capital gains paid along the way.
The Lord Abbett Equity Fund's net asset value on May 31 was $26.94, according to Morningstar, the fund tracker in Chicago.
With the expiration of the fund's insurance policy on May 31, Lord Abbett executives anticipated there would be little to attract new assets to the fund.
In March, the fund's board of directors recommended to investors that the fund be merged into the large-cap growth fund which was introduced in December.
The fund was introduced when investors were under-invested in the equity market, said McLaughlin. Investors were putting assets in what was then high-yield bank certificates of deposit and were holding bonds purchased in the 1980s.
"The fund was created to allow investors and their consultants to get exposure to the equity markets and remove the fear barrier," said McLaughlin.
The fund was promoted as a way to invest in the equity markets without losing money, said McLaughlin. As recently as February, the fund's annual report promoted the fund as having, "The growth potential of stocks with the security of insurance."
In 1990, Lord Abbett executives considered introducing a series of insured equity funds that would be marketed to individuals primarily invested in other than equities. But the firm retreated when the underwriter seemed unenthusiastic and concerns were raised over reserve requirements, said McLaughlin.
The insurance policy itself cost the fund 0.50 percent annually based on assets under management, according to SEC filings. In 1999, the fund's insurance premiums were $58,000.
The fund was also hampered by the fact that the fund's underwriter imposed limitations on how the fund's assets could be invested. The fund was required to invest 20 percent of its portfolio in U.S. Government securities as a condition of that insurance, according to SEC filings.
The market's current volatility and uncertainty was likely to lead to stricter requirements and that prospect was a determinant in Lord Abbett's decision not to preserve the fund as it was or to extend its insurance, said McLaughlin. Financial Security was likely to require an even greater portion of the equity fund, perhaps up to 35 percent, be invested in U.S. Government securities, according to the May 25 proxy.
The underwriter also might have required additional assets be invested in other short-term debt securities, "which could reduce the benefit from any upswing in the equity market..." the proxy said. This could prevent the fund from achieving its objective of providing equity returns, Lord Abbett said in the filing.
"We wish we had done more of a marketing effort when we rolled it [the Lord Abbett Equity Fund] out," said McLaughlin. The fund adviser has no plans to offer other insured funds. Lord Abbett is the adviser to more than 30 mutual fund portfolios and manages $35 billion in assets.
