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Kathy Panagopouloskathy.panagopoulos@morningstar.com
Morningstar Reviews 'Guaranteed' Investments to Determine If They Can Be Both Safe and Smart

CHICAGO, Sep 12, 2002 – In response to gut-wrenching market declines, mutual fund companies have been launching investment products that guarantee the original investment, so investors won't lose money. The September issue of Morningstar® FundInvestorTM, a monthly newsletter for individual investors, highlights the benefits and drawbacks of two guaranteed products: Stable-value funds and principal-protection funds. 

In his article "Is a Safe Investment Also a Smart Investment?," mutual fund analyst Brian Portnoy helps investors understand the intricacies of both investments and compares stable-value funds to principal-protection funds.

"Our concern is that investors are fleeing to guaranteed funds out of panic rather than matching investment goals with appropriate securities," Portnoy said. "Stable-value funds can make sense, but principal-protection funds are largely folly." He concludes that principal-protection funds are expensive, confusing, and inappropriate for investors with long-term financial goals.

Some key features of stable-value funds and principal-protection funds include:

Stable-Value Funds: Better Than Cash (Maybe) 

  • Guarantee the principal investment and maintain a stable net asset value (NAV).  
  • Are similar to a money-market fund because the NAV never fluctuates, but they aim to deliver a slightly higher return.   
  • Typically own short-to-intermediate-maturity bonds spread across different sectors.   
  • Expensive fees can erode stable-value funds' potential advantage over most bond funds.  
  • Redemption fees, found on most stable-value funds, can make it difficult to move cash easily when better opportunities call.  
  • The private sector, not the government, guarantees the funds, so investors need to double-check who's insuring the fund.

Principal-Protection Funds: Buyer Beware

  • Comprised of hybrid (stock and bond) portfolios with insurance that guarantees the principal after several years.  
  • Usually an "offering period" when investors can register, and then a "guarantee period" when everyone's money is invested on the same day and is locked away, typically for five or seven years.  
  • Weighted heavily toward bonds, sometimes entirely, creating limited upside.  
  • Expenses can be extremely high (climbing above 2 percent), especially relative to super-cheap government bond funds.   
  • The insurance company providing the guarantee can usurp asset-allocation duties if it thinks management is taking on too much risk.  
  • In its efforts to manage risk, funds can drop investment performance out of the equation.  
  • The prospectus can be annoyingly opaque.

About Morningstar, Inc.
Chicago-based Morningstar, Inc. is a global investment research firm, offering an extensive line of print, software, and Internet-based products and services for individuals, financial advisors, institutions, and the media. The company is a trusted source for investment information, data, and analysis of stocks, mutual funds, and exchange-traded funds.

For a copy of "Is a Safe Investment Also a Smart Investment?," or a complimentary subscription to Morningstar® FundInvestorTM, contact Kathy Habiger, Morningstar Corporate Communications, 312-696-6241 or kathy.habiger@morningstar.com.

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