Q. Emergency question: Which is a better long term investment--- Annuities or mutual funds?

---S.N., Wishek, ND

  

A. We need to distinguish between the animal and its cage. Annuities and mutual funds are cages, the animals we put in those cages are investments. Here are the major distinctions:

An annuity is an insurance based product that allows the return on your investment to accumulate tax deferred. There are two major types of tax deferred annuities, fixed income and variable.  

In fixed income annuities your investment is part of the insurance companies general account and the insurance company credits you with a rate of interest. At the end of February the Fisher Annuity Index was at 7.02 percent. This is the average current yield on over 700 annuities offered by 139 companies. Generally speaking, the rate is a little better than 5 year Treasuries and a little less than 10 year Treasuries. Long term, you can expect these investments to compound nicely but to have a return that is less than the long term return on common stocks.

A variable annuity is actually an insurance contract wrapped around a separate account that is usually invested in mutual funds. It has the advantage that if the insurance company has financial trouble, your investment is NOT part of the companies' general account. It has the additional advantage of being able to invest in virtually any asset class... so you can own shares in funds that invest in U.S. stocks, foreign stocks, junk bonds, etc. In many variable annuities you can create a diversified portfolio of different asset classes. This has the potential for providing a higher long term return than investing in a fixed income annuity.

A mutual fund is an instrument for pooling and managing the investments of many individuals. Where the money is invested depends on the stated purpose of the fund. With over 5,000 mutual funds they have almost every purpose imaginable. You could, for instance, invest in an intermediate term Treasury fund and get a return very similar to the return on a fixed income annuity. Or you could choose assets with more risk but higher long term returns.

Because mutual funds don't have the insurance component, they have the advantage of lower costs for the consumer. If you have the choice of putting a regular mutual fund in an IRA, 401k, or 403b account, you should do that rather than putting a variable annuity in a program that ALREADY has tax deferral.

  

Q. Is there a book or reference guide that identifies corporations that have direct stock purchase plans for the benefit of their shareholders?   We participate in a few of these plans and find that they are useful in allowing regular investments in amounts that aren't cost effective if used to purchase stock through a broker.

---G.H., Eden Prairie, MN

  

A. There are only a handful of companies that allow direct investment from the very first share. But there are hundreds--- nearly a thousand--- that allow ADDITIONAL investment after you have become a shareholder. One source of information is a newsletter called "The Moneypaper" which reports regularly on the performance of DRIP companies. They also produce a guide to Dividend Reinvestment Plans, listing companies with discount, no cost, and modest cost reinvestment plans along with additional money that can be invested each quarter. You can subscribe to their newsletter between now and May 15 for $36 ( it's usually $72); subscribers can get a copy of their Guide To Dividend Reinvestment Plans for an additional $9. If you just want the Guide the price is $25. It is also possible to get the same information on a MAC formatted computer disc for $45, including 3 updates. Publisher Vita Nelson informs me that a DOS version disc will be available soon. To order, call 800-388-9993.

  

Q. In a recent column you said that the Euro-Pacific Growth fund from the American Funds group was a good choice.   Could you tell us where to get more information on this fund?

---J.F., Crosley, MN

  

A. In the 92 foreign funds that have 3 year track records, this fund ranked at the 18 percentile, meaning that it provided a better performance than 82 percent of all funds with the same purpose. It's performance over other time periods is also in the top 25 percent or better. The list below, rank ordered by return over the last three years, shows the top performing foreign funds, their sales charge ( if any) and phone number. Those with loads are available at most major brokerage houses. It should be noted that some of these funds aren't available to retail investors. chart