Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on NEXT Monday, March 24, 2014. You can also find the re-balance calendar for 2013 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Variable Annuity Portfolio Review

Variable annuities are not for everyone: these products usually have complex fee structures. However, for those who can spend more time to understand these products (especially the fees and restrictions such as surrender charges and expenses) or for those who have committed to these products (yours included), understanding how these annuities’ investments can be used to construct a good asset allocation portfolio is still important and valuable. 

Variable Annuity Cost 

Though this article does not address annuity cost, which is the most complicated area that requires comprehensive study to understand, we feel we would like to touch this area a bit more as it is the most important (in addition to properly investing and grow your portfolio value).  

The following are various charges from a variable annuity: 

  • Administrative fees
  • Sales load: especially those sold by agents
  • Mortality and expense risk charge: beware of the increasing fee while you are aging!
  • Surrender charge: if you try to stop your plan before certain number of years you are in the plan, you will be hit with such penalty charge. 
  • Fees for other features
  • Underlying fund/portfolio expenses

You can find some basic material from the website by the U.S. Securities and Exchange Commission (SEC). 

Vanguard provides a simple variable annuity cost calculator that can be useful to understand an annuity cost. To compare the costs of two annuities other than the Vanguard’s, you can compare each of them with Vanguard’s and arrive the cost for each annuity and then compare. 

Finally, investors should know that you can do a tax-free ‘1035’ exchange to switch to a better annuity if you feel your current annuity is too expensive or provides lousy investment options. Before doing so, you should understand whether there is a surrender charge involved in the exchange. 

Annuity Portfolio Construction

Since variable annuity’s investment capital gains are tax deferred (similar to 401k and IRA plans), investors are free of short term or long term capital gain tax consequences and should focus on how to maximize returns with managed (acceptable) risks. 

Even though the tax advantage of Strategic Asset Allocation is not relevant in annuity investing, we think that depending on personal situation (and your overall investable asset consideration), keeping some portion in a strategic allocation portfolio can serve as a bedrock to your overall annuity investments. Again, in general, we advocate the core-satellite approach that invests some part in strategic and the rest in a  Tactical Asset Allocation portfolio. For investors who have a small annuity portfolio or who don’t want to do too much work, we suggest using tactical portfolios as these portfolios tend to protect capital during market downturns (thus have much smaller drawdown). For many annuity investors, having a less volatile portfolio is important as these portfolios are not only subject to periodical fee charges, they are also more for income purpose, especially for those who are in retirement or use annuity portfolios as part of regular income. 

Annuity Portfolio Comparison

We will review the following annuity plan investment portfolios:

The first three plans are provided by large brokerages while the last one is a typical life insurance company provided annuity plan. 

Jefferson and Fidelity plans have the most comprehensive asset coverage: in addition to the usual 5 major asset classes: US stocks, international stocks, emerging market stocks, REITs and fixed income, both provide commodity mutual funds (PIMCO’s commodity fund PCRRX). 

Fidelity plan uses mostly Fidelity advisor funds. Some of them are excellent funds such as Fidelity Contrafund,  However, we are also surprised that other good funds such as Fidelity low priced stock fund is not available. Furthermore, there is no small cap stock fund.  On the fixed income side, we are pleased to see it includes both PIMCO Total Return Bond and Templeton Global Bond (TGBAX), both of them can be excellent actively managed bond fund choices. Overall, the plan provides a reasonable lineup of fund choices. 

Vanguard annuity has only 17 portfolios to be chosen from. All of them are extremely low cost. On the equity side, emerging market stocks and some U.S. stock style funds (such as small cap value) funds are missing. On the fixed income side, a high yield bond fund and one short term and one intermediate term bond fund are provided. Overall, the plan is designed for stability purpose. 

Schwab actually provides several annuity investment plans, in addition to the one mentioned above.  Schwab OneSource Annuity provides a complete U.S. stock style fund coverage, though we believe some of funds are excessive. On fixed income side, it relies on several PIMCO bond funds. 

Like many life and annuity companies, Jefferson national provides hundred of fund choices.  The current Jefferson National Variable Annuity Selected was constructed out of 366 investment choices the company sent to us.  We simply excluded Rydex and ProFunds, along with some customized asset allocation portfolios. However, even after the exclusion, the current plan still has 179 investment choices, a lineup that truly has to rely on a systematic fund picking. This list consists of many excellent funds: on the equity side, good funds from Alger, American Funds, Columbia and Mutual Series are included. On the fixed income side, many PIMCO bond funds are complemented with Franklin and Pioneer, to name a few. We are also pleased to see that the plan includes low cost index funds from Vanguard and DFA. Overall, this plan provides ample opportunity to construct some excellent portfolios. 

The following table and chart compare the strategic and tactical portfolios from these plans: 

 Portfolio Performance Comparison (as of 3/17/2014): 

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Jefferson National Variable Annuity Selected Tactical Asset Allocation Moderate 2.1% 11.5% 7.2% 14.3% 1.42 11.4% 1.04
Schwab OneSource Annuity Tactical Asset Allocation Moderate 1.4% 8.4% 8.6% 13.2% 1.43 11.8% 1.2
Vanguard Variable Annuity Tactical Asset Allocation Moderate 2.1% 8.6% 8.1% 12.1% 1.26 8.6% 0.88
Fidelity Personal Retirement Annuity Tactical Asset Allocation Moderate 2.3% 11.0% 6.3% 12.0% 1.14 9.9% 0.89
Jefferson National Variable Annuity Selected Strategic Asset Allocation – Optimal Moderate 1.7% 7.2% 6.7% 14.4% 1.47 7.5% 0.55
Schwab OneSource Annuity Strategic Asset Allocation – Optimal Moderate 1.5% 7.7% 8.8% 16.5% 1.53 8.0% 0.57
Vanguard Variable Annuity Strategic Asset Allocation – Optimal Moderate 2.2% 11.1% 8.4% 15.3% 1.29 7.3% 0.49
Fidelity Personal Retirement Annuity Strategic Asset Allocation – Optimal Moderate 0.9% 6.0% 6.5% 14.8% 1.24 7.5% 0.5

**YTD: Year to Date

See the latest year by year detailed comparison >>

Finally, we caution that there are several caveats in the above portfolios. For one, since we are using mutual fund proxies for many custom or commingled pool funds, they are not necessarily adequate to reflect the actual performance. Furthermore, since we rely on mutual funds expenses, the performance of these portfolios are not necessarily accurate in the actual investments, especially if some such funds charge higher hidden expenses. For that, we ask investors to look at funds more carefully when you decide to commit to an annuity investment fund. 

In conclusion, one can usually construct a reasonable investment portfolio from some good variable annuity plans, so long as the other side of equation – cost is understood and taken care of. 

Market Overview

Markets recovered a bit from last week’s sell off. We notice that REITs have shown some strength since the beginning of the year. However, commodities and emerging market stocks have been consistently at the bottom of our trend score ranking for over a year now.  In general, markets have been going nowhere for a while now, even though in U.S. stocks, our stock style ranking is still showing investors’ risk on appetite. 

For more detailed asset trend scores, please refer to 360° Market Overview.

We would like to remind our readers that markets are more precarious now than other times in the last 5 years. It is a good time and imperative to adjust to a risk level you are comfortable with right now.  However, recognizing our deficiency to predict the markets, we will stay on course. 

We again copy our position statements (from previous newsletters): 

Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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