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Solving for Volatility


On Tuesday night, New York City was hit with heavy snowfall, and temperatures this week have fallen into the single digits at times. That's provided a great opportunity for folks like me to hunker down at their desks and get caught up with long-procrastinated tasks. I'm feeling quite productive!

After posting my latest report on Monday I did some further thinking around the growing use of volatility-control funds (VCFs) in the industry.

A notable recent occurence, that I captured in the report, was that Jackson National, an insurer that heretofore has eschewed imposing investment restrictions on its rider holders, registered several new VCFs. This could be a sign that the company needs some assistance with its benefit hedging. In the past, Jackson has said that its clients choose balanced sub-account allocations on their own, however even if that's the case, one would think the outliers - those who pick benefits and invest aggressively - would become problematic, even if they are only a small portion of Jackson's client base. I will be interested to see how Jackson uses the new funds - it will be a sea change for the insurer if it uses them in models that will limit rider owners' choices.

Secondly, in the report I mentioned how Pacific Life and Invesco are looking to revise existing portfolios to add vol management. In the case of Invesco, the change will be subject to a shareholder vote but I'm figuring that should go through without a hitch; it's rare that such plans are voted down.

Which brings me to the task of keeping up with variable VCFs: While putting together my report I noticed that I failed to add to my Featured Research VCF spreadsheet two funds that were reconstituted to add vol management last year. They were from BlackRock and MassMutual.

I'm kicking myself because I had captured those changes in my monthly fund reports but didn't get around to adding them to the spreadsheet. I will certainly include them in the next update, which will contain asset data for 4Q13. At some point soon I'll go back to correct earlier editions of the sheet and re-post them.

In closing, I'll say that it's my suspicion that the addition of vol management to existing variable portfolios might be partly motivated by insurers' desire to have holders of older benefits - those that have few or no investment restrictions - invest in the converted funds, provided the owners are in them already. A number of insurers with legacy business have said they are interested in adding VCFs to their in-force. Slipping the vol management into funds already in operation could be a way to accomplish that.

No matter what the motivation behind the offering of VCFs, I expect more of them to come out, as they are providing a solution, even if imperfect, to insurers' risk management needs.


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