BlackRock: FIAs, critical in holistic portfolio construction

Research from the firm’s retirement insurance team shows that fixed indexed annuities can add value and protection to retirement investors.

is down 70% and commodities are up, but still down over 30% on a 10-year basis, having complementary solutions is critical for retirement investors, according to Zamkovsky.

“We believe having tools like FIAs is in the toolkit is critical when thinking about holistic portfolio construction. We're in an incredibly dynamic market environment, but the overall concepts around the values of accumulation phase continue to hold true,” he said.

funded, and reduces extreme bad outcomes and balanced portfolios, particularly when funded from stocks and bonds. Additionally, incorporating an FIA with an underlying vol control index can also help provide more certainty around future portfolio values.

Portfolio Allocation

Having protected solutions for retirement is more important than ever in the current market environment. That was the word from the head of indexed annuities and insurance at BlackRock’s Retirement Insurance Group, Igor Zamkovsky (pictured), who made the case for adding fixed indexed annuities (FIAs) in the accumulation phase of retirement portfolios at a recent webinar presented by the US National Association for Fixed Annuities (NAFA).

In an environment where stocks are down 20%, bonds are down 15%, bitcoin

According to Zamkovsky, the years before and right after retirement which cover a period of 10 years also known as the ‘retirement red zone’ is an important time when upside and protection are key.

“If the markets are great, we're set, but you don’t want to be retiring in 2022 with your portfolio down 20%,” he said.

BlackRock’s retirement insurance team modelled a seven-year product with capital market assumptions and ran them through a series of Monte Carlo simulations to look at the range of returns.

The research found that a FIA allocation can offer greater upside than the immediate scenario when suitably

The research looks at a situation where a portfolio is constantly positive plus 5% a year for seven years, and constantly negative minus 5% a year for seven years. On the plus 5% scenario, when the markets keep going up, and stocks and bonds are up, there was a 3% decrease in the expected value of the portfolio incorporating a FIA allocation. On the minus 5% scenario, there was a 13% improvement in portfolio outcomes.

“60/40 is down in a big way, and the economic outlook continues to be challenged,” said Zamkovsky.

“Our hypothesis is that the case for a FIA has become more compelling than ever. The bond alternative story is stronger than ever.”

However, BlackRock is taking a slightly different approach to it and has started talking about FIAs as a stock and bond alternative.

“The focus here is on avoiding extreme downside market scenarios, and less on growth,” he said. “As we have seen stocks can go down in a big way, so conservative investors can allocate from stocks and bonds in a prorated fashion to fund the FIA portion of the portfolio.”

According to Zamkovsky, to fund the FIA allocation investors can use their fixed income and equity buckets, as well as cash.

Vol Control

BlackRock’s research also found that volatility control indices have “a lot of benefits and can deliver a lot of value”.

“But it is important to highlight that there are benefits and trade-offs,” said Zamkovsky.

According to the research which looks in cluster at historical returns of vol control indices, using a vol control index can help gain more confidence on future portfolio values by clustering returns in a narrower distribution.

“They also can allow for participation in extreme positive market moves, if they're used with a participation rate strategy,” said Zamkovsky. “[These indices] are not intended, on average, to hit it out of the park but to deliver more stable returns. Because of the volatility control nature, it's easier to see them in participation rate strategies.”

On the flip side, because of that narrow distribution, vol control structures are expected to deliver less extreme positive outcomes.

“There's also an incredible proliferation of options and it really difficult to choose the right index. We certainly believe that choosing a FIA linked to a vol control index should be part of an active conversation between a client and advisor about outcome expectations and desired confidence around target outcomes,” said Zamkovsky.

The research concluded that a FIA allocation can offer greater upside in the median scenario when suitably funded, and by allocation it may reduce extreme bad outcomes and balance portfolios.

“For conservative and cash heavy portfolios, FIAs may improve worse to median outcomes, assuming liquidity needs have been met. And incorporating a FIA with a vol control index can help provide more certainty around future portfolio values,” said Zamkovsky.