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Fund Spy

Even Managers Can't Stomach These Funds

Despite all the hype, managers won't buy their own principal-protection funds.

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Always be wary of a fund whose strategy sounds more like a marketing pitch.

Get exposure to stocks without any of the downside. That's the pitch of principal-protection funds, and it sounds pretty compelling. If you just hold the funds for five years you'll get your principal back, as well as possibly some price appreciation to boot. Principal-protection funds buy stocks to give you market exposure, but they also guarantee your principal by buying bonds and possibly an insurance wrapper.

At the risk of causing you to feel a little weltschmerz, I have to tell you the funds don't live up to their promise. We were wary of these funds from the beginning, and time is bearing out those views. Most of the funds have produced dismal returns. In fact, about half haven't even made it back to their original $10 share NAVs.

Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.