The Absolute Return Unicorn - Investment Products Offering Both Gains and Protections Prove Elusive

The asset management industry has struggled to provide older investors and retirees with investment products that provide returns with little or no risk of losing principal.

In other words, the industry has not had any success in developing investment products that provide return without any risk.

A recent Wall Street Journal article discusses many of these failed attempts and explains how:

"creating investments that promise investors both gains and protections is essentially like trying to work alchemy in the financial markets."

The Journal article does mention that while "traditional guaranteed investments such as annuities" can provide predictable income or protection from losses, one of the main challenges is to do so in a way that is low cost and does not lock up money for years.

Why, one might ask, the focus on the free lunch?  Why should anyone expect protections or guarantees to be free when hedging and insurance are expensive?

Investors seem more than happy to chase and pay-up for investment performance.  It is likely that hedge fund managers George Soros and Eddie Lampert are paid 2% of every dollar under management as well as 20% of any profits during a given year.

Why is the value proposition of an annuity so easily discounted because of costs that are equal to or less than what is charged by many asset managers who provide no guarantees whatsoever?

One could argue that variable annuities with living benefits, fixed indexed annuities and immediate annuities with inflation protection do a fine job of:

  1. Protecting principal.
  2. Providing stable, guaranteed income.
  3. Providing for some upside in the event of capital market gains.

Then there is the liquidity criticism which boils down to “annuities are unattractive because the money spent is irrevocable or tied-up forever.”

The reality is that there are many products and optional product features that address this issue and provide higher levels of liquidity and access to funds.  Maybe it is the investment management industry that is worried about the funds being tied-up and “out of play” from the standpoint of other investments?

Take a look at some of the posts and slides from Professor Babbel that compare the performance of fixed indexed annuities to alternative investments over various time periods.  Maybe the fixed indexed annuity is the absolute return unicorn??

Key Phrases Autotag: 


It is a reference to a term that was used in an article in the Financial Analysts Journal. As referenced in the Wall Street Journal article, the FAJ article discussed the "impossibility of delivering returns that are positive and high regardless of the market."