It had been a fairly quiet year for the U.S. equity market volatility until mid- to late July.
The Dow Jones industrial average was around 18,000 at that time and the CBOE Volatility Index — the VIX — was below 15.
Market sentiment soured soon afterward, though.
By Aug. 21, the Dow dropped to the 16,600 range and entered correction territory while the VIX had spiked to over 25. Some market pundits were declaring that the bull market was nearing an end and investors should brace themselves for significant movement lower.
Should that happen, it will be interesting to see how managed volatility variable annuities (MVVAs) hold up. The motivation for MVVAs is clear from the issuing insurers’ perspective. Highly volatile markets make it more difficult to price VAs’ living benefits correctly.
If an issuer can manage an underlying portfolio’s volatility effectively, it’s easier to hedge against risk and estimate a portfolio’s range of returns.
From the investors’ perspective, managed volatility can help reduce the impact of equity market downturns — the so-called “tail risk” — which in turn can reduce the urge to sell stocks at precisely the wrong time.
Numerous VA-issuers use the managed volatility strategy. According to research firm Strategic Insights, MVVAs held about 75 percent of the $361 billion of managed volatility assets at the end of 2014’s second quarter.