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Life Health > Annuities

5 Lessons on Investment Indexes Used by Insurers, Other Firms

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What You Need to Know

  • Laurence Black knows how to review indexes because he's developed index recipes himself.
  • He argues that binging on plain vanilla indexes is risky for retirement returns.
  • One quick test of an index team's risk control strategy is how they performed in March 2020.

Laurence Black has started The Index Standard, a company that could help bring order and quality ratings to the world’s rapidly growing list of investment indexes.

Black has been working in the index world since 2003, when he was head of thematic research and indexes at a business that’s now part of ABN AMRO. While there, he launched investment indexes with super investors such as Jim Rogers and Joel Greenblatt.

He then became global head of the quantitative index team at Barclays Investment Bank. There, Black developed designer investment indexes with financial rock stars Robert Shiller and Nouriel Roubini.

Since June 2019, he has worked as Shiller’s own index advisor, and in September 2019, he began to set up The Index Standard.

His goal has been to create what amounts to the equivalent of a Zagat’s restaurant guide for investment indexes. The company will evaluate and rate investment indexes, and the products built around the indexes, such as ETFs, and indexed annuities.

The firm bases its ratings on a scoring system that includes about 30 criteria, including measures of returns, efficiency, capital at risk, and expected future returns.

It has started by rating the 150 indexes used in indexed annuities and about 500 of the indexes used inside ETFs. Black says he’s especially interested in indexes developed by teams that have said they hope to control investment risk.

The firm is also using simulations to predict how investment indexes and ETFs might perform over the next 10 years.

Here are five things Black has said about investment indexes and index rating efforts, drawn from a recent interview.

1. Gorging on plain vanilla can be dangerous.

Early on, insurers linked most indexed life and annuity products to the performance of the well-known S&P 500 index. Later, insurers began to branch out and use a few indexes that were almost as well known.

Black said steering too many life and annuity product owners toward the S&P 500 in an effort to decrease risk could actually create risk.

“It’s very expensive,” Black said.

Another concern, he said, is that about 40% of the value of that index is in tech stocks.

2. The index haters are exaggerating.

“There’s a misconception,” Black said, “that the new indexes are opaque and over-engineered.”

That might have been true 15 or 20 years ago, he said, but today, banks and other organizations behind new indexes put the index programs through many layers of investment performance and compliance reviews.

In addition, they do everything possible to understand how a similar index would have performed in downturns in the past, and how each index might perform in slumps in the future.

3. One good test of an index team is availability of index rules.

The Index Standard can get the rules for about 80% of the indexes it tracks, Black said.

4. A good test of a risk-controlled index is March 2020.

The S&P 500 fell about 34% within a month around then, because of investor worries about the effects of the COVID-19 pandemic and pandemic-related lockdowns.

An index that actually protects investors against some investment risk should have been down less than 34% that month, Black said.

5. Many investment index teams passed the March 2020 test and other Index Standard screens.

Over the past few years, “the risk-controlled indices performed incredibly well,” Black said.

In March 2020, for example, risk-controlled indexes tied to U.S. markets fell just 11%, according to an Index Standard analysis.


Laurence Black (Photo: The Index Standard)


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