Funds Blog

Mutual Funds And Investment Assets

At first glance, the life insurance industry appears to be in trouble as it faces the millennium. As the large baby boomer market ages, these consumers have shifted their financial focus away from life insurance and towards assuring their future comfort. Although the industry has long recognized that its future lies in more in financial products than in life insurance, it has lately been losing its share of the retirement market

While mutual funds and brokerage houses have been expanding their market share, their inroads have been mostly at the expense of depository institutions, not life insurance companines. The retirement market is a growing financial feast, even if insurers do have to compete a little harder for their share of the bounty. By the end of 1996, total private retirement assets in the U.S. stood at almost $5.1 trillion, having increased as a share of total national wealth from 10.6% in 1983 to 13.6%.

Individual retirement accounts, although no longer as attractive as a saving vehicle due to the loss of most tax advantages in 1986, still capture a huge amount of total retirement assets. By the end of 1996, savings in IRAs had swollen to $1.35 trillion, representing around 3% of U.S. wealth. Most of the growth was from gains in the equity market rather than in new contributions.

With these developments in mind, strategy for life insurance firms in the decade ahead need to aim at stopping their skid out of the retirement market, where they have fallen from a 22.7% market share in 1983 to 18% in 1996. 1. Retain dominance in annuities by increasing cost efficiency in delivery and holding down fees, to maintain competitiveness with other financial services. 2. Slow down loss of market share for IRA accounts. While this market has diminished in terms of new contributions, financial returns on existing IRA assets have grown to 12% of insurance company pension assets as of 1996, from 3.3% in 1983. 3. Jump with both feet into the exploding 401(k) market, with particular emphasis on pursuing the fat market for rollover accounts.

Insurers’ strength is that they can leverage a wide spectrum of products to help them to protect their presence in the retirement marketplace. For example, they can offer one-stop shopping for a combination of retirement income, long-term care coverage and estate protection. By offering consumers products that blend traditional risk protection with asset management, insurers may be able to protect their own future.

High-profile money managers deserted the traditional mutual fund industry in droves in the early 1990s, seeking fame and fortune as hedge fund managers. Unfortunately, history repeated itself in the late 1990s and into the early 2000s as a number of high-profile hedge funds, including Robertson’s, failed in spectacular fashion.

Despite troubles in the last few years, the hedge fund industry continues to thrive. The development of the “fund of funds”, which is simplistically defined as a mutual fund that invests in multiple hedge funds, provided greater diversification for investors’ portfolios and reduced the minimum investment requirement to as low as $25,000. The introduction of the fund of funds not only took some of the risk out of hedge fund investing, but also made the product more accessible to the average investor.