NEWS FLASH FROM

the "grass is green, sky is blue" department: Mutual funds run by insurance companies aren't very good. So say a trio of finance professors, who have documented what many fund-industry observers have noticed for years. More startling, perhaps, is how seriously and persistently insurance-company mutual funds underperform on average, shareholders trail by 1.5 percentage points per year. On a $10,000 investment, that could be a difference of $19,000 over 20 years.

Why such lackluster results? The academics trace the biggest reason to what they call a "flow performance" problem. Typically, when a fund performs poorly, investors take their money out. But investors in insurance-company funds are disproportionately loyal. "Even when performance is bad, clients do not move their money," says Tong Yu, an associate professor at the University of Rhode Island and coauthor of the study. That leads to a culture of middling returns that can persist without consequence. One reason for this, he suggests, is that insurance-company funds tend to attract less-sophisticated investors, who may fail to monitor performance closely.

The new research quantifies a trend that analysts like Morningstar's Russel Kinnel have been watching for a while. He sees insurance-company funds as an afterthought: "They want to have mutual funds but not necessarily good ones." Kinnel also says that John Hancock crippled its asset management arm to cut costs before its 2004 sale; SunAmerica funds tend to rotate managers as if they were on a lazy Susan. And State Farm's best offerings are restricted to its employees.

Insurance execs say the criticisms aren't fair. "Structurally, there's no difference between one of our retail funds and a Franklin Templeton fund," says Scott Hintz, an assistant vice president of mutual funds at State Farm. His counterpart at John Hancock says that the company has devoted more resources to its funds in the past few years. Yu, though, isn't buying it: "The underperformance persists everywhere we look." Insurance companies do sell a valuable service it's called insurance. For mutual funds, look elsewhere.