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Sammons Annuity, IRA Use Asset Allocation Model to Simplify Fund Selection

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Sammons Retirement Solutions held a Web seminar on Thursday discussing two new products launched in February.

The LiveWell variable annuity and mutual fund IRA incorporate asset allocation models designed by Morningstar, Ann Hughes, head of business and sales development, said on the call.

 “Advisors were asking for assistance with selecting funds,” Hughes said. “We went to Morningstar to see if they could assist us in building asset allocation models and risk questionnaires.”

As of Aug. 15, two models are available along with a risk questionnaire, Hughes said. There are two types of models. One is a fund-specific model that includes pre-selected funds for portfolios of various risk levels. In the other, Morningstar provides an asset class framework across various risk levels. Advisors pick the individual funds based on the asset class framework.

To develop the models, Morningstar first developed asset class inputs to forecast asset class behavior. “We try to forecast the asset class behavior to try to come up with expected returns, standard deviation and correlation,” said Lucian Marinescu, senior consultant at Morningstar Investment Management.

Using those inputs, Morningstar then runs mean variance optimization to determine the maximum return for a given level of risk, according to Marinescu. The portfolios have a higher non-U.S. exposure relative to typical U.S. portfolios with more emerging market exposure.

“We then analyze the investment options that are available and create our own customized style benchmark for each option,” Marinescu said. “We look at their beta exposure and in order to get that, we look at return-based analysis, holdings analysis, quantitative analysis and qualitative analysis.”

Morningstar also researches managers on funds selected for the models, performing a quantitative and qualitative analysis. As part of its research, Morningstar looks at short-term performance persistence, active share or tracking error, and the momentum and liquidity of underlying stocks.  As part of the qualitative analysis, Morningstar interviews the managers and look at five pillars: parent, team, process, performance, price.

“Our main goal is to hit the target asset allocation model,” Marinescu said.

The final step in the process is monitoring the portfolio. “We basically go through the five steps on an annual basis,” Marinescu said, “and make sure the portfolios are still providing a good risk-reward trade-off.”


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