Mutual funds run by insurance companies aren’t very good

January 14, 2008 at 1:36 pm Leave a comment

Don’t take my word for it, that’s a key line in an article on SmartMoney Magazine’s most recent issue titled When Insurers Don’t Protect You. It’s hard to argue with one of the nation’s leading financial magazine’s, and I’ve said the exact same thing about how poor the earnings are in mutual funds included within an insurance product. Let’s dig in.

According to Janet Paskin’s article, insurance-company mutual funds have consistently underperformed for years. “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.”

The trio of academics who have documented these findings state this is due to a “flow performance” issue. What you find in most mutual fund management companies is that money is taken out as a fund’s performance declines. This is not the case with insurance companies, who tend to remain “loyal” to funds that under-perform year after year. Of course, a case can be made that investors have some blame by not making changes or even monitoring performance.

Morningstar analyst Russel Kinnel also suggests that insurance-company funds are seen as an afterthought, “They want to have mutual funds but not necessarily good ones.” In fact, State Farm’s best fund offerings are restricted to company employees.

Of course, insurance executives like Scott Hintz, assistant vice president of mutual funds at State Farm, and his counterpart at John Hancock, say that these criticisms aren’t fair. Tong Yu, professor at the University of Rhode Island and co-author of the study, argues that “the underperformance persists everywhere we look.”

“Insurance companies do sell a valuable service–it’s called insurance. For mutual funds, look elsewhere.”

—–
Source:
Paskin, Janet (February 2008). “When insurers don’t protect you”. SmartMoney, p. 20.

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Entry filed under: Insurance, Saving and Investing.

It feels good to not have to use the emergency fund We’ve made a decision to stop our debt snowball — temporarily

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