An Annuity-Based Antidote to Volatility
Ohio National’s innovative new benefit uses advanced hedging strategies to shave downside risk while preserving upside potential
What keeps you awake at night? For many investors, it’s not the memories of the 2008-09 market nosedive so much as the nerve-wracking equity market rollercoaster ride they have been forced to endure since then.
Volatility has emerged as many an investor’s worst enemy. Huge equity market swings are holding people and their financial futures hostage, leaving them to wonder whether their nest eggs — the assets they worked so long and hard to build — can recover from another devastating market downturn, especially if that downturn comes with retirement close at hand.
The antidote to volatility and the anxiety it creates is an investment vehicle that provides a smoother ride, one that protects investment assets from the depths of downside risk so they can recover faster from market downturns, while at the same time keeping their money in the equity market so it can grow over time.
A groundbreaking new variable annuity (VA) feature offered within Ohio National’s ONcore VA portfolio does just that. It provides investors access to a powerful, battle- tested and dynamically-managed hedging strategy that protects their assets while leaving plenty of room for upside growth as retirement approaches. It also gives them the ability to convert money inside the annuity into a guaranteed income stream to last through retirement. (Guarantees based upon the claims-paying ability of the issuing insurance company.)
“In a choppy market, it’s designed to smooth out the ride, preserving cash value inside the [annuity investment] portfolio,” explains H. Douglas Cooke III, vice president of institutional sales at Ohio National.
“Say you have an investment that loses 50% of its value. You’re going to need that investment to come back 100% just to get back to where you were. That hole can take years to climb out of, and people who are close to retirement usually don’t have the luxury of lots of time,” says wealth manager and annuity expert Thomas B. Hamlin, CEO of Somerset Wealth Strategies in Portland, Ore. “The type of feature we are talking about here should give people peace of mind that they won’t have to dig out of a hole like the one they may have found themselves in in 2008 or 2009.”
Once reserved strictly for sophisticated institutional investors, this type of cutting-edge volatility-management program is now accessible to mainstream investors via the optional Guaranteed Lifetime Withdrawal Benefit Plus (GLWB Plus) Rider available with Ohio National’s ONcore variable annuities. The ONcore GLWB Plus stands out in the crowded field of annuity withdrawal benefits not only for the richness of its features — a robust 8% annual accumulation rate, a 200% deferral credit if no withdrawals are taken in the first 10 years the GLWB Plus rider is in effect, an eight-year principal-protection guarantee and a highly competitive annual payout of 5.25% starting at age 65 — but for the advanced volatility-management strategy underpinning those features.
That strategy is unique in the annuity marketplace, incorporating TOPS exchange traded fund (ETF) portfolios, the longest running managed ETF portfolios in the country, along with futures-based equity positions inside the annuity’s subaccounts. Those subaccounts are actively managed by the highly regarded risk-management strategist Milliman, Inc., using its custom-developed and market-tested hedging algorithms and methodologies.
More annuity providers are including ETFs among their subaccount options in order to afford investors access to a diversified and liquid equity-based asset that typically carries lower expenses than many mutual funds, which can translate into lower annuity fees. What makes the Ohio National GLWB Plus unique, however, is its use of ETFs in tandem with hedging instruments, a combination designed to both manage volatility and protect capital, resulting in more consistent, predictable returns over time.
The TOPS-Milliman hedging strategy is designed to allow investors to capture 75% of upside market movements while subjecting them to just 25% participation in downside movements, explains Michael McClary, TOPS’ chief investment officer. Eliminating the depths of significant market drops (which have become all-too-frequent in today’s environment; in 2011, there were more than 60 days in which the S&P 500 index moved at least 2% higher or lower) gives investors a better chance to recover losses.
“It’s like having someone step in during times of times of high volatility and put the brakes on a little bit,” says McClary.
As part of the strategy to manage volatility, Milliman fund managers continuously shift hedge assets, taking short positions on equity index futures when the market goes up and when the market drops, shifting immediately into capital-preservation mode by exiting those positions and beefing up the portfolio’s long ETF positions.
Why does this matter to you? For one, the Milliman hedging program that Ohio National has incorporated into its ONcore variable annuity GLWB Plus Riders actually works. “We’re having a lot of success with these funds. They’re working exactly as they were designed to,” says McClary. For example, while the S&P 500 Index fell close to 14% in the third quarter of 2011, the three TOPS protected portfolios underlying the GLWB Plus Riders were limited to losses of only about 4.5 to 6.5%, according to McClary.
What’s more, hedging at the subaccount level, within the annuity investment structure, helps insurers better manage their balance sheets, which in many cases benefits investors to the tune of richer benefits and lower fees on features such as a GLWB Plus.
Meanwhile, financial advisors such as Hamlin like the built-in volatility-management feature of the ONcore GLWB Plus too, because it gives them a versatile vehicle to help them accomplish three key client goals: building wealth, preserving capital and securing a guaranteed income stream through retirement.
“That,” says Hamlin, “should help investors sleep well at night.”