AIG Valic has introduced a series of life-cycle mutual funds that are among the first to guarantee both principal and market gains achieved during the life of the investment.
Valic's portfolios, dubbed the High Watermark Funds, could prove popular with retail bank customers seeking alternatives to more traditional investment vehicles, according to John Packs, a senior investment officer in the Valic group retirement unit of American International Group Inc.
Valic's life-cycle portfolios set target maturity dates of 2010, 2015, and 2020. They are invested in combinations of equity and fixed-income securities, depending on their maturity dates. Underlying investments include S&P 500 Index futures, noncallable U.S. government securities, and high-grade money market instruments.
For banks, the High Watermark Funds may fill a niche between traditional guaranteed products, such as certificates of deposit and guaranteed investment contracts, and typical mutual funds that lack an insurance component, Mr. Packs said.
Banks can offer a retail version of the funds as part of their mutual fund platforms, Mr. Packs said. Houston-based AIG Valic also offers an institutional version of the funds to qualified retirement plans.
Investment products with an insurance component are proving increasingly popular with a broad swath of investors, industry watchers say. The insurance feature soothes some customers who remain nervous about reentering the equity markets after the 2001-2002 bear market, Mr. Packs said.
Though some mutual funds guarantee against loss of principal, few, if any, also lock in market gains. The High Watermark Funds let investors who hold shares to maturity receive the highest net asset value attained after purchase.
"It's the next generation of products in [the life-cycle] category," Mr. Packs said. The funds offer investors "exposure to the equity markets with the knowledge that capital and gains will be protected."
"It's a gutsy move," said Carmen Effron, the president of the CF Effron Co. bank insurance consulting firm in Westport, Conn., regarding the introduction of an insurance-wrapped investment product that locks in market gains.
The funds are similar to the variable products that got Allmerica Financial Corp. in trouble early this decade when equity markets tanked, sticking the Worcester, Mass., insurer with guaranteed death benefit liabilities based on the highest value achieved during the market bubble of the late 1990s.
The products' underlying investments during the bear market could no longer support the benefit guarantees, and Allmerica was forced to stop offering them. This August it agreed to sell its runoff variable life insurance and annuity business to Goldman Sachs Group.
The High Watermark Funds' guarantee is backed by an agreement with Prudential Global Funding - a unit of the Newark, N.J., insurance giant Prudential Financial Inc. - that adds 35 basis points to expenses.
A year ago August, Atlanta-based ING U.S. Financial Services, a subsidiary of the Netherlands' ING Group NV, introduced the ING Principal Protection Fund XI, which can allocate assets to equities, fixed-income securities, or both. The fund protects the principal of investors who hold the product for the full five-year guarantee period. MBIA Insurance Corp. in Armonk. N.Y., backs the guarantee.
