Are Safe-Haven Funds Your Best Bet Now?

Physician's Money DigestJuly15 2003
Volume 10
Issue 13

The bear market and shaky economyhave more and more physician investorslooking for a safe haven for theirhard-earned cash. In 2002, investorspulled $27 billion out of equity mutualfunds and put $140 billion into bondfunds—a record, according to theInvestment Company Institute. Fear is gettinga grip on many investors, and sometimesruling their investment decisions.


An article in reports that WallStreet is pushing safe havens like stable valuefunds, which guarantee againstvolatility, and principal-protection funds,which are insured against loss of principal(before fees), regardless of what the marketsdo. But there are huge differencesbetween the legitimate products and theillicit ones that investors need to knowabout. In addition, investors should considerstable-value funds or low-cost annuitiesas segments of a broader portfolio.


Stable-value mutual funds are portfoliosof short- to intermediate-term bonds,guaranteed investment contracts (GICs), ora combination of the 2, with an insurancewrapper that keeps the fund's net assetvalue stable. These investments, which arecreated for retirement plans, make up 28%of all assets in 401(k)s, according to pensionconsultant Hewitt Associates.

Morningstar senior analyst BrianPortnoy says stable-value funds can be agood, safe investment from which youwill get something better than a moneymarket and less than an intermediatebond fund. Although stable-value fundsare aimed at retirees, younger investorscan use them to replace or enlarge theconservative portion of a broader portfolio.Annual returns for such investmentshaven't dropped below 5% over the past2 decades, according to Heuler Analytics.


bottom line:

While most stable-value funds areavailable only through 401(k) plans, a fewrecently-launched retail funds are nowbeing offered to individual investors forIRAs. The institutional funds are lessexpensive than retail funds. However, thecosts are low for no-load retail funds. Stable-value funds are agood investment choice for safety-mindedinvestors, but there is a downside. If interestrates shoot back up from their historiclows, money markets will respond morequickly than stable-value funds.


Principal-protection funds, which investin a combination of stocks andbonds, are insured against loss of principal.These funds include both an investmentportion and an insurance wrapper,which guarantees investors will get backtheir principal (minus fees) as long asthey stay in for the guarantee period (ie,usually 5 or 7 years).

There are 2 disadvantages to principal protectionfunds you should know about.First, it's unlikely there will be much upsidefrom a stock market rebound since theportfolios are now overwhelmingly inbonds. Second, principal-protection fundsare costly (1.75% to 2.25% for A-sharefees). Portnoy says, if you have a long time horizonand are willing to take on risk,you're better off in a no-load equity fund.

Con artists are more than happy tocater to investors' fears, and spotting theirscams can be tricky. Promoters of prime bankscams claim that investors' funds willbe used to purchase and trade nonexistent"prime-bank" financial instrumentson secret overseas markets, generatinglarge guaranteed returns. These scams arebelieved to siphon at least $1.5 billionannually from investors. You also need tobe aware of promissory-note scams, whichpromise high returns with very low risk.

The SEC has brought more than 100cases against prime-bank fraud promoters,and the FBI recently did a sweepagainst some of these schemes. If youthink you might have fallen prey to a"safe" investment scam, contact the FBI'scorporate fraud hotline (888-622-0117),the SEC's complaint center (, and your state's securitiesregulator, which you can findthrough the North American SecuritiesAdministrators Association (202-737-0900;

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