Pricing and performance of mutual funds: lookback versus interest rate guarantees

Nadine Gatzert, Hato Schmeiser

Abstract

ABSTRACT

The aim of this paper is to compare pricing and performance of mutual funds with two types of guarantees: a lookback guarantee and an interest rate guarantee. In a simulation analysis of different portfolios based on stock, bond, real estate and money market indexes, we first calibrate guarantee costs to be the same for both investment guarantee funds. Second, their performance is contrasted, measured with the Sharpe ratio, omega and Sortino ratio, and a test with respect to first-, second- and third-order stochastic dominance is provided. We further investigate the impact of the underlying fund's strategy, first looking at a conventional fund having a constant average rate of return and standard deviation over the contract term, and then at a constant proportion portfolio insurance managed fund. This analysis is intended to provide insights for investors with different risk-return preferences regarding the interaction of guarantee costs and the performance of different mutual funds with embedded investment guarantees.