Combine the Power of Annuities, Mutual Funds
08/11/08 - 09:32 AM EDT
Stan Luxenberg
For many people, the perfect investment in today's difficult markets would combine the strong long-term returns of a top mutual fund and the protection against losses offered by some annuities.
In the real world, no such optimum vehicle has existed -- but that could be changing. Now, financial engineers are tinkering with the standard formats, developing hybrids that include mixes of features. The distinction between annuities and funds is normally clear. While annuities include expensive insurance contracts that can protect assets, mutual funds are cheaper and come with no guarantees. The latest creations include annuities that resemble funds and funds with annuity-like protections. Eventually the line between annuities and funds could disappear altogether. One mutual fund with elements of an annuity is DWS Lifecompass Income. Investing in a mix of stocks and bonds, the portfolio began in December 2007 with the aim of paying out regular income for the next ten years. Shareholders receive 8.25% of their initial investment annually. At the end of the 10 years, investors get any assets remaining in the portfolio. If the investments perform poorly, the portfolio could be depleted before the decade ends. But DWS promises to make all the scheduled annual payments and deliver a final installment equal to at least 17.5% of the initial principal. In other words, the fund company pledges to return at least the principal over the course of 10 years. Critics may contend that the DWS goal is modest. But the approach represents a dramatic step for the fund industry, which has rarely been willing to stand behind its products. Investors who watched their stocks plummet this year could be intrigued by a mutual fund that promises not to lose money.
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