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SmartMoney Magazine by Janet Paskin (Author Archive)
Mutual Funds Run by Insurance Companies Lag Their Peers
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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.
I have held various mutual funds for the last 25 - 30 years and actively manage and trade my own funds. Some insurance companies,such as John Hanc!*k, have a few of the better performing funds in certain categories. However, the majority underperform compared to other funds in their categories, plus, I am unaware of any insurance company no-load fund. As for annuities, brokers love to promote them for a reason. They are the most profitable offerings they have.
Right on bstone15!!!!! Education is powerful and will enrich lives if ever used. I've been concerned about what our professors (whose research had been sited) are teaching for a long time now. Makes me want to go into education in my next career life - the kids could use a teacher with private sector experience.
I've been a fully licensed advisor for quite some time now and it still cracks me up everytime I hear comments like the one above from mkatz2m. I work for one of the largest Banks in the world for the record. He states to never hand money over to any insurance company under any circumstances. This is plain ignorance. I recommend a very broad range of investments to my clients and annuities sometimes make perfect sense in certain situations. The general public needs to educate themselves on annuities so they truly can understand how beneficial they can be for many people. It's this lack of education and understanding that continues giving insurance/annuity products a bad name. Sit down with a financial advisor and let them fully explain how an annuity can be beneficial then make your judgements.
As a series 7 licensed advisor, I can sell and service REITS, Junk Bonds, Annuities and a host of other financial products. To say one is better than the other is a matter of circumstance that cannot be explained in a short paragraph. They ALL have advantages and disadvantages. To say all annuities are bad would be like saying steroids are bad for all who take them. Yes, maybe for healthy baseball players but not for someone with severe asthma or a premature baby. As Chuck said above, it would take more research to make that determination.
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Peter, your opinion, although popular, is not true. I work for a bank not an insurance company and I am not compensated any more for annuities than I am for any other investment. Fees inside variable annuities are going to be a little highter, but the question is: Is having my money protected worth it? Not to mention the other benefits such a guaranteed death benefit which many people were very thankful of after 9/11 as well as the tax deferred growth for non qualified accounts. Some variable annuities offer the top investment companies in the world to invest in and will also guarantee your benefit base to grow at a min 7%. Last I checked a Lincoln Navigator was a little more expensive than a Ford Focus.