Ask Your VA Wholesaler About How The VAs Funds Are Performing

By Harvey D. Hirsch

Every variable annuity wholesaler tells a great story about his or her VAs funds. Each one has a fistful of glossy Fund Fact Sheets, too.

But the stories and sheets dont tell you the whole story.

To separate the leaders from the laggards, you need to ask your wholesalers some key questions about fund performance. Here are some of the most critical ones to pose, and why:

How do your funds stack up to the competition’s?

You should know if the funds give the VA a competitive advantage.

One simple approach: Have the wholesaler compare the Morningstar ratings for the funds to the ratings of several relevant competitor products. The chart shows how such a comparison might look.

The profile shown in the chart points to some interesting findings. As you review it, keep in mind that Morningstar rates 10.0% of VA sub-accounts as 5 Star, 22.5% are 4 Star, 35.0% are 3 Star, 22.5% are 2 Star, and 10.0% are 1 Star.

As shown, the product for our sample wholesaler has the strongest fund line-up, with over half the funds rated 5 Star or 4 Star and none rated 1 Star or 2 Star.

By comparison, Product 1 is relatively weak, with no 5 Star funds and almost half the other funds rated as 1 Star and 2 Star. Product 2 does have a 5 Star fund, but almost half of the rest are rated only 1 Star or 2 Star. As for Product 3, with its balanced distribution of funds, it is in a somewhat stronger competitive position than Products 1 and 2.

What are the total returns of the funds in this VA?

Ask the wholesaler for a report showing total returns of each portfolio in his product. The report should present returns for various time periods. Most wholesalers have this. What they dont have is a comparison of fund returns to appropriate benchmarks including one or more indexes and other portfolios in the same investment category. Without benchmarks, the data loses a lot of meaning.

How much risk did the fund managers take on in order to achieve the returns?

Although crucial, total return information tells only part of the story. Ask about risk. And, be sure risk information is benchmarked. For example, you may want to avoid a fund that takes on much more risk than the S&P 500 but outperforms the index only slightly.

How do the fund managers select securities?

Many managers select securities with a well-defined process. You should understand it.

One common approach starts with a universe of possible investments and then using various screens, eliminates those not meeting certain criteria. For example, a manager may start with all securities in the S&P 500 and then eliminate those not increasing their dividends each year for the past five years.

How does the fund manager construct the portfolio?

Portfolio construction–the process of combining acceptable investments in the right mix to build a superior portfolio–is often less well defined. A disciplined approach here increases the chances of a portfolio performing well against its return and risk benchmarks and being structured to reduce risk without sacrificing return.

Who manages the portfolio?

Some managers rely on a single manager. Others use a team approach, which can help ensure a seamless transition to a new manager and continuity in day-to-day portfolio management.

To assess the strength of the manager(s), obtain a profile of the key decision makers. Check out their experience, tenure in their current position, and track record. You may also find it useful to know what tools are available to portfolio managers. For example, do they rely on internally generated or Street research? If the former, who does the research, how is it conducted and how are researchers evaluated?

Does the product offer so-called clone funds?

Most VAs offer at least one fund that has been cloned from, or modeled after, a mutual fund. Particularly when a sub-advisor is involved, you should understand how, and to what extent, the two portfolios are kept in lockstep. You should also request a report comparing the portfolios in terms of their holdings, total returns, and risk.

How was the products asset allocation program developed?

Asset allocation programs are designed to offer the potential of increased returns for a willingness to accept greater risk. Some were developed using a systematic, comprehensive approach, but others were created less formally. Ask how the program was developed and how well the model portfolios deliver on their underlying promise.

Answers to questions such as these should help you to assess the VAs fund offerings with a clearer understanding. As you work with clients, this information and understanding will contribute to the informed decision-making process that is so vital to your practice.

Harvey D. Hirsch is a financial services marketing consultant in New York City. His e-mail is HDHirsch@erols.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, April 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.