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Biggest Banks Made Fewer, Larger PPP Loans

Posted on May 21, 2020 by No Author -

Did Adding Trump’s Name Slow the Stimulus Checks?

Posted on May 21, 2020 by Eugene Steuerle -

Did the Treasury Department’s decision to put President Trump’s name on the coronavirus stimulus checks slow the mailing of those checks? Of course it did, despite Administration claims to the contrary.

The decision surrounding Trump’s name triggered a series of time-consuming steps. The White House consulted with top Treasury officials who, in turn, talked to top IRS officials, who, after some delay because of the political sensitivity of the matter, communicated with the agency’s staffers who had to carry out the operation.

These civil servants had to redesign the basic check, mock up the display of the president’s name, and rejigger computer software needed to produce the checks. Then they had to have the redesign reviewed at the IRS, Treasury, and, likely, the White House to both insure against technical glitches and make sure the president was satisfied.

Did this take time? Of course, it did. Does it matter a lot? Well, that’s a different question.

It certainly took attention from other, more important, matters. Senior Trump Administration officials, including the Treasury Secretary and the Commissioner of the IRS, were spending time on marketing the president rather than on, say, reviving the economy or preventing occurrences of tax fraud likely to accompany any rush to get the payments out.

Did it slow down the payment of checks to people? Here’s how a Treasury spokesperson carefully answered that question:

“Economic Impact Payment checks are scheduled to go out on time and exactly as planned — there is absolutely no delay whatsoever…In fact, we expect the first checks to be in the mail early next week which is well in advance of when the first checks went out in 2008 and well in advance of initial estimates.”

Nothing in that statement says that the additional process did not slow down the mailing of the checks relative to when they could have been mailed out. The comparison with 2008 is irrelevant.

Meanwhile, the IRS released another statement, to wit:

Thanks to hard work and long hours by dedicated IRS employees, these payments are going out on schedule, as planned, without delay, to the nation.”

Well, the same calculations take place in all aspects of life as well.

Consider the brag about checks going “out on time” or “on schedule.” If I tell my wife I will be home by 7 PM and then take an extra walk around town but still get home by 7 PM, did my stroll delay my arrival? Of course, it did. In fact, it is likely that IRS expected to be ahead of the original “schedule” before it had to add the president’s name to those checks.

Think of it this way: Suppose the IRS staff worked all night to add the president’s name to the checks. That all-night session may have avoided delay relative to the prior schedule. But, if the staff didn’t have to add his name, working that extra night could have been devoted to getting the checks out earlier.

Maybe figuring out the extent of any delay isn’t at the heart of the issue. There are more important matters to worry about in these days of COVID-19. Even if somehow all this extra effort caused no delay, it’s demeaning to ask career professionals in places like IRS to devote their time and attention to promoting the president’s reelection.

This request has nothing to do with helping the taxpayers they pledge and, as the IRS release indicated, “work hard” to serve. Worse yet, this accommodation of the president’s wishes reinstates a bad precedent for political interference in the operations of the IRS. These actions have real consequences, none of them good.

This column originally appeared on TaxVox on April 30, 2020.

One bright spot in first quarter annuity sales

Posted on May 21, 2020 by Editorial Staff -

Sales of structured indexed variable annuities (aka registered index-linked annuities or RILAs) were $4.9 billion in the first quarter 2020, up 38% from the prior year, according to final results from the Secure Retirement Institute (SRI) U.S. Individual Annuity Sales Survey.

“Current market conditions favor RILA products more than fixed indexed annuities (FIA) as the increase in market volatility will help support crediting rates in RILAs,” said Todd Giesing, senior annuity research director, SRI, in a release today. “As a result, SRI is forecasting RILA sales to increase more than 10% in 2020 while FIA sales are expected to fall about 20%.”

Jackson National was the top seller of all types of annuities in the first quarter of 2020, with variable annuity sales of $3.98 billion and total sales of just under $5 billion. AIG Companies sold the most fixed annuities, with $2.52 billion, just ahead of New York Life at $2.37 billion. Total industry sales were $55.87 billion, with the top 20 companies accounting for 77% of the total. For rankings, click here.

Final FIA sales were $16.2 billion, down 10% from first quarter 2019. This marks the third consecutive quarter of declines for FIAs. Continued low interest rates are expected to dampen FIA sales throughout the year. SRI is forecasting annual sales of $60 billion or less, far below the record sales of $73 billion set in 2019.

“Accumulation-focused FIAs without guaranteed lifetime benefit riders (GLB) experienced the greatest decline in the first quarter, down 13% compared with prior year,” Giesing said. “These products’ crediting rates continued to decline in the first quarter because of the unfavorable interest rates, which were further exacerbated by the significant rate drop in March.”

Sales of fixed-rate deferred annuities dropped 35% in the first quarter, to $9.8 billion, compared with prior year. This was 4% higher than sales in the fourth quarter “as investors sought the principal protection these products offer,” the release said.

SRI predicts fixed-rate deferred annuity sales will benefit from investors seeking principal protection, which will keep sales even with 2019 levels despite the ultra-low interest rate environment.

“As we saw during the Great Recession, we expect fixed-rate deferred product sales to remain steady in the second quarter as consumers seek to protect their investment from market volatility and losses,” Giesing said.

Income annuity sales plunge

Total income annuity sales fell 29% in the first quarter of 2020, compared with first quarter of 2019. Falling interest rates have deterred investors from purchasing these products.

Sales of single premium immediate annuities (SPIA) totaled $1.9 billion in the first quarter, down 32% from the first quarter of 2019. It was the lowest quarterly level of SPIA sales in nearly seven years. Deferred income annuities totaled $470 million in the first quarter, down 26% from 2019.

SRI is forecasting income annuities to continue to contract in 2020, falling more than 35% from 2019 sales totals.

Total variable annuity sales were $26.0 billion, up 14% in the first quarter due to RILA sales expansion, marking the fourth consecutive quarter of sales increases.

“Despite the market volatility in March, variable annuity sales performed well,” said Giesing. “There tends to be a lag between market conditions and sales so we expect to see the impact of March’s volatility in the second quarter.

“While RILAs are positioned to do well under these economic conditions and are expected to continue to perform well in 2020, SRI is forecasting overall variable annuity sales to drop 10% in 2020,” he added. “Sales of VA products in 2020 will mirror the trajectory we saw following the Great Recession. Market volatility and low interest rates will force companies to carefully manage their VA business, limiting sales — especially products with GLB riders.”

First quarter 2020 annuities industry estimates, representing 94% of the total market, can be found in LIMRA’s Fact Tank.

To see the rankings of the top 20 annuity issuers for the first quarter of 2020, visit First Quarter 2020 Annuity Rankings. For top 20 issuers of only fixed annuity writers for the first quarter 2020, visit First Quarter 2020 Fixed Annuity Rankings.

Prudential (finally) joins structured variable annuity race

Posted on May 21, 2020 by Editorial Staff -

Prudential Financial has jumped into the fastest-growing segment of the beleaguered annuity market—the $17.4 billion market for structured variable annuities–by issuing its first registered index-lined annuity contract, called FlexGuard.

The contract, announced this week, has been issued as a B-share variable annuity (with a six-year surrender period with a 7% withdrawal penalty in the first year) and will be marketed through broker-dealers. A no-commission (I-share) version for fee-based advisers will be issued later this year, Prudential said. The product is registered with the SEC, so a prospectus is available. For a current rate sheet, click here.

In January 2018, Prudential issued its first fixed index annuity (FIA), called PruSecure. But the Federal Reserve’s easing policy, which started last August and accelerated with the COVID-19 crisis, brought lower interests and lower bond yields. That hurts the ability of life insurers to offer attractive potential crediting rates on FIAs.

“We accelerated our product launch [of FlexGuard] because of the interest rate environment,” Dianne Bogoian, vice president of product development at Prudential Annuities, told RIJ this week. “We have a number of brokerage firms approved to sell FlexGuard, and we’re rapidly expanding that list.”

The indexed/structured variable annuity product has generally found a Goldilocks spot in the market for accumulation-stage, risk-managed investment products. It offers more downside protection than a typical variable annuity and more upside potential than a typical FIA or other fixed income investment. As an insurance product, it also offers tax-deferred growth. While this product type is not designed to produce income, a contract owner can convert the assets to a retirement income stream.

With structured variable annuities, as with fixed indexed annuities (FIAs), the life insurance company typically invests the client’s premium in its general account and uses part of the income to buy options or other derivatives on the movement of an equity index such as the S&P 500 Index, an exchange-traded fund (ETF), or a customized benchmark.

Structured variable annuities have steadily grown in popularity over the past decade, since AXA (now Equitable) introduced the first one in 2010. They are not as sensitive to interest rate movements as FIAs; the recent drop in rates has reduced their potential yields. Issuers can also offer higher potential yields on structured variable annuities because the contract owners bear a limited risk of loss–either up to a “floor” or beyond a “buffer.”

Sales of structured variable annuities (also called Registered Index-Linked Annuities or RILAs) jumped 55% in 2019 over 2018, to $17.4 billion, according to the LIMRA Secure Retirement Institute. That’s far below 2019 sales of FIAs ($73.5 billion). But in the fourth quarter of 2019, FIA sales were down 13% from the fourth quarter of 2018 while RILA sales were up 39% over that span of time.

FlexGuard offers three crediting strategies: A point-to-point cap rate strategy that can work like a typical FIA; a “Tiered” Participation Rate strategy, and a Step Rate Plus strategy. Returns can be linked either to the S&P 500 Index or the MSCI-EAFE, which holds shares in companies in 21 developed countries outside the U.S. and Canada.

Point to point with a cap strategy. The investor can get the index return up to a cap over a crediting period of either one year, three years or six years. As for downside protection, the investor can choose to accept all loss beyond 10% over a one-year or three-year term, or zero loss over one year (with the S&P 500 Index only). Those who choose a three-year term can elect a buffer of 10% or 20%. Those who choose a six-year term 20% buffer, which means they accept net losses beyond the first 20%.

Tiered Participation Rate strategy. This strategy is for people willing to commit their money for the maximum six-year term. The investor earns 100% of the index return up to a cap (20%, for example) and 130% of any gain above the cap. If the index rose 80% in six years, the investor would get 20% plus 78% (1.3 x 60%) for a total of 98% over six years. The product has a 10% buffer.

Step Rate Plus strategy. In this strategy, available only with a one-year term, the investor earns a “step” rate (6%, for instance) if the index gain is positive but equal to or less than the step rate. If the gain exceeds the step rate, the investor earns (“participates in”) 90% of the total gain.

Unlike smaller annuity issuers, which buy the options for their FIAs and structured variable annuities from investment banks, Prudential creates its hedging strategies in-house, with help from financial engineers at Prudential Global Investment Management (PGIM).

Prudential’s fee-based MyRock variable annuity added a new “Dynamic Income Benefit” in April 2020 and an expanded fund lineup earlier in the year. “It provides greater market upside income potential, investment control and flexibility, lower cost compared to most other variable annuity income benefits, and the ability to carry over unused income from one year to the next,” a Prudential release said.

AIG adds new index to its Power Series FIAs

AIG Life & Retirement, a division of American International Group, Inc., has added the new Legg Mason Quality Dividend Index, which was developed exclusively for The Power Series of index annuities, from AIG member company American General Life Insurance Company. It will be distributed primarily through independent broker-dealers, banks and other financial institutions.

The Legg Mason Quality Dividend Index holds mainly high-quality dividend-paying stocks. It uses a “rules-based process to dynamically allocate between high dividend-paying stocks, stocks with high levels of price stability, and cash,” according to an AIG release. The allocation among stocks is adjusted monthly. Cash positions are managed daily.

Honorable Mention

Posted on May 14, 2020 by Editorial Staff -

DPL Financial Partners will distribute no-commission VA from Transamerica

DPL Financial Partners, an online insurance marketplace for registered investment advisors (RIAs), will offer Transamerica’s I-Share variable annuity to DPL’s 800 RIA member firms.

The annuity features subaccount options from American Funds, BlackRock, T. Rowe Price, Janus and other investment managers in equity, fixed-income and alternatives, along with several living benefits “expected to appeal to fee-only advisors and their clients,” according to a DPL press release.

The annuity’s optional living benefits provides the opportunity to lock in account value annually, based on the highest monthly policy value (versus quarterly or annually), as well as several other living benefit riders with customizable features. DPL will begin offering the product on its platform in mid-May 2020.

NextCapital to provide ‘managed advice’ to MassMutual plan participants

Massachusetts Mutual Life Insurance Company (MassMutual) announced today a new managed advice solution that allows for greater personalization of investment strategies.

The new service, called Manage My Retirement, is a professionally managed account service through NextCapital Advisers, Inc., an enterprise digital advice provider.

The service “will help defined contribution retirement plan savers choose a path to retirement that matches their unique personalities and circumstances with the goal of helping them achieve better retirement outcomes,” according to a MassMutual release.

The services are available for 401(k), 403(b) and 457 plans and can be customized with a specific plan’s available investment options.

NextCapital’s Manage My Retirement ‘advice engine’ builds a personalized retirement plan and portfolio for each participant, using up to 30 specific data points, including retirement age, savings rate, gender, marital status, health, salary risk, guaranteed income, and funding gap, among others.

These data points are used to create a personalized investment portfolio, which is monitored and automatically adjusted as circumstances change. Manage My Retirement also gives each participant a personalized retirement plan, which includes start date and savings recommendations, as well as retirement income forecasts.

“The $8 trillion defined contribution market is shifting to personalized managed advice to better meet the unique needs of each retirement saver,” said Rob Foregger, co-founder & EVP of NextCapital, in the release. “With over 2.6 million retirement plan participants, we are excited MassMutual has selected NextCapital’s digital advice platform to help deliver better retirement outcomes.”

Manage My Retirement will also focus on the needs of advisory firms and plan advisers. By leveraging NextCapital’s flexible technology, MassMutual can provide customized solutions for different firms. These firms can include their own investment selections, choose varying levels of advisory interaction, and choose their fiduciary role. They can even collaborate with MassMutual and NextCapital to adjust advice methodology inputs, like capital market assumptions.

NextCapital’s open-architecture digital advice solution provides integrated account aggregation, analytics, planning and portfolio management, and allows partners to customize advice methodology and fiduciary roles.

Great American enhances its Index Frontier contracts

Great American Life added three new indexed strategies to its Index Frontier registered index-linked annuities. The three new indexes are:

S&P 500 10% Buffer Indexed Strategy
iShares MSCI EAFE Conserve Indexed Strategy with 0% Floor
iShares MSCI EAFE Growth Indexed Strategy with -10% Floor

“The new Buffer strategy, which protects against the first 10% of losses at the end of each one-year term, gives consumers greater flexibility in how they choose to protect their money – and with the ability to reallocate among strategies at the end of each term, they can adjust their exposure in alignment with different market cycles,” a Great American release said.

Additionally, the new iShares MSCI EAFE indexed strategies offer exposure to developed international markets. Consumers can choose between the Conserve strategy, which offers complete downside protection, and the Growth strategy, which protects against losses in excess of 10%.

These new strategies are in addition to the Index Frontier’s current offerings, which provide exposure to the broad-based market, commodities and the real estate sector.

Equitable enhances its flagship Structured Capital Strategies registered index-linked annuity

Equitable, a subsidiary of Equitable Holdings, has enhanced its Structured Capital Strategies PLUS registered index-linked annuity—the first product of its type, first offered a decade ago by then-AXA Equitable—that offers clients some upside potential even when the S&P 500 benchmark index goes down.

The new feature, Dual Direction, is available within SCS PLUS annuities with the S&P 500 as the benchmark index. Dual Direction offers clients the following benefits:

If the S&P 500 benchmark index declines up to or equal to 10% at the end of the six-year investment time frame, clients earn a positive return equal to the percentage of the decline up to or equal to 10%.
If the S&P 500 benchmark index declines more than 10%, the client is protected from the first 10% of losses.

Recently, Equitable added a new feature in select versions of Structured Capital Strategies, which allows clients to invest on a one-year basis, giving them the flexibility to realize potential returns or partial downside protection more quickly.

Equitable introduced Structured Capital Strategies, the first registered index-linked, or buffered, annuity in 2010. Through Structured Capital Strategies, clients can participate in the performance of one of several mainstream equity market indices up to a cap, with Equitable absorbing the first -10%, -20% or -30% of potential losses.

Clients can choose the equity index on which the performance of their investment is based, such as the S&P 500 Price Return Index, Russell 2000 Price Return Index or iShares MSCI EAFE ETF, the duration of the investment and the level of downside protection based on their goals and risk tolerance.

Government Purchases Might Speed the Recovery: Steuerle

Posted on May 14, 2020 by Eugene Steuerle -

The current recession derives from two sources: demand and supply. On the demand side, consumers are purchasing fewer durable goods (e.g., automobiles) and spending much less on services such as all forms of transportation.

On the supply side, there has been a massive decline in supply of goods and services as workers stay home and supply chains break, leading to a collapse of trade networks, further disrupting firms that can’t get the physical or worker inputs they need to produce their own output.

Accordingly, some writers, including my colleague, Howard Gleckman, have criticized the extent to which stimulus packages so far have emphasized the demand side of the market, particularly with rebate payments to almost everyone, regardless of need. My purpose here isn’t to measure the extent to which that criticism applies to all the provisions enacted so far, but rather to ask how future legislation can better be oriented toward increasing supply and demand at the same time and, thereby, increasing employment. The short answer: increase government purchases.

Basic economic theory teaches that under certain conditions government purchases do more than tax cuts or increases in transfers to stimulate the economy. That’s because a dollar of purchases effectively creates a demand for that purchase, leads to an increased supply of labor to fulfill that purchase, and then leaves a dollar of income in the hands of the those who supply the goods and services purchased. This is especially relevant in today’s economic downturn.

When government simply puts a dollar of tax cut or transfer increase in our hands, but without purchasing anything, we often simply tuck that dollar under the mattress, so to speak, in which case there is no increase either in demand or supply.
Consistent with health concerns, therefore, Congress should strongly consider which types of stimuli are most likely to help minimize supply disruptions and more immediately increase employment.

You can see such concerns expressed partly in the efforts of Congress to keep people on the payrolls of existing firms. Along the same lines, the President and others have also suggested ramping up spending on infrastructure. Of course, implementing this type of response requires some thought as to what can or must be produced, consistent with minimizing additional health threats to those involved.

Here are a few examples:
We will need many additional healthcare workers who, with minimal training, could perform routine functions, whether testing for the coronavirus in the tens of millions rather than tens of thousands, as now, or giving tens of millions of vaccine shots when they become available.

Government should start training more people to perform those functions now. Bill Gates has already suggested that we need to build the facilities now that will be able to generate billions of vaccines worldwide when that opportunity becomes available. Those production efforts and the training of health care workers are complementary actions.

Among the hardest hit of all sectors, restaurants deserve special attention. If we want to keep more of them viable, the government could give people vouchers that can be spent on take-out restaurant meals. Normally this would be quite inefficient, but it’s probably more efficient than simply paying restaurants to hang onto staff who have few functions to perform. More educators could be hired now to develop better online tools for teaching, not just for the short-term needs arising from social isolation, but for the longer-term opportunities that information technology provides.

State and local governments clearly have rising needs to serve their citizens even as their revenues start to plummet. Congress should ensure, to the extent possible, that much of the federal support given to those governments goes toward currently purchasing additional goods and services, as opposed to being saved to offset the tax increases or transfer cuts these governments may need to impose down the road.

Even independently of federal help, states facing balanced budget constitutional restrictions should realize that additional state and local purchases, even if offset by temporary tax increases or cuts in salaries, still increase output in times of high unemployment.

Charities need resources to deal with increased demands. The recently enacted $300 tax deduction for charitable contributions offered to non-itemizers in the CARES Act probably won’t increase either charitable giving or charitable output by much at all. Government instead could take steps to purchase more services from charities. Every dollar spent that way will increase charitable output by roughly the same amount, a much more efficient result.

Infrastructure may be hard to begin immediately; “shovel-ready” projects were hard to find in the Great Recession. However, the ramp-up could start now, particularly if the longer-term financing needed to support these projects was put into place when the projects were authorized.

While none of this is easy and certainly doesn’t address health and other welfare issues, the next tranches of Congressional legislation should increasingly give due consideration to the stimulative impact of additional purchases of goods and services in bringing workers back into the productive economy.

This article first appeared at Tax Vox on April 20.

US Employment Statistics, March – April 2020

Posted on May 14, 2020 by No Author -

With BluePrint Income, AARP Ups its Ante on Annuity Sales

Posted on May 14, 2020 by Kerry Pechter -

AARP members get a lot of discounts for their $16-a-year membership fees. They get discounts on steak dinners at McCormick & Schmick’s, cash-back on Chase credit-card purchases, 20% off the price of Harry & David’s curated fruit boxes, cheap ZipCar rates and so on.

With the purchasing power of 38 million age 50+ members behind it, AARP also offers deals on insurance—on MedicareAdvantage plans from United HealthCare, long-term care coverage from New York Life, auto insurance from The Hartford, and dental plans from Delta. There’s even coverage for your dog or cat from PetPlan.

Annuities are also on AARP’s menu of services for older Americans. Until recently, New York Life was AARP’s sole vendor of income annuities. This month, AARP switched gears to partner with Blueprint Income, a New York-based fintech firm, to create a multi-provider, multi-product online annuity sales platform.

“We thought that having a choice of annuities would be a benefit to our members,” said John Larew, president and CEO of AARP Services, Inc. (AARP Services, Inc., a for-profit company, is legally at arms-length from AARP, the non-profit organization that advocates for older Americans. AARP Services generated almost $840 million in royalty revenue for AARP in 2015, the most recent data available.)

AARP members who visit the platform will find quotes (generated by CANNEX) from seven highly-rated life insurance companies on the kinds of annuities that Americans buy the least of—single premium immediate and deferred income annuities (SPIAs and DIAs), Personal Pensions (DIAs that are funded with monthly contributions over decades) and CD-like multi-year guaranteed rate fixed deferred annuities (MYGAs).

The historically tiny sales of those products, and the nation’s return to an ultra-low interest rate environment, pose headwinds for Blueprint Income. Nonetheless, its young founders believe that simple, transparent annuities that pool longevity risk just need the right distribution technology and the kind of break that the partnership with AARP Services may provide.

AARP Services evidently felt the same. “When its contract with New York Life was expiring, AARP Services expressed some interest in working with us,” said Matt Carey, Blueprint Income’s CEO and co-founder (with fellow Penn alumnus Adam Colombo and fellow Wharton School alumnus Nimish Shukla). “They wanted something more like a platform, that was more ‘tech forward,’ and that had multiple life insurers.”

Quotes from seven insurers

If you visit the AARP/Blueprint site, the first thing you see is an image of a white coffee cup on a table in front of a tablet computer that displays sample annuity quotes. As you scroll down, you choose one of the three tracks: “Fixed Annuity” (MYGAs), “Income Annuity” (SPIAs, DIAs and Qualified Longevity Annuity Contracts or QLACs) and “Personal Pension,” which is a multi-premium deferred income annuity.

The site is mainly a quote-and-sales engine, plus lots of education and phone support, rather than a planning engine per se. If a visitor picks the Income Annuity path, he or she finds prompts for inputs about birth date, gender, state of residence and whether the annuity is for one or two people. The next page requests income start date, premium amount, and whether the premium payment is from a tax-deferred or taxable account. Then you click to see the exact quotes.

The annuity issuers include New York Life, Guardian Life, Mutual of Omaha, Western & Southern Financial Group, Pacific Life, Lincoln Financial, and Principal Financial Group. All are rated A+ or better by A.M. Best. All except two are mutual companies; Lincoln and Principal are publicly traded.

AARP members don’t necessarily get higher payout rates or better yields when they order an annuity on the platform. But they do get a complimentary annual “retirement income check-up” from a salaried, insurance-licensed Blueprint Income adviser—plus AARP’s implicit seal of approval.

What you don’t see on the site is a planning calculator per se. There’s no wizard that requires health status (for life expectancy estimates), total savings, home equity (for reverse mortgage or downsizing potential), estimated expenses in retirement, or guaranteed income sources—any or all of which would help determine what percentage of a person’s overall portfolio needs to be allocated to an income annuity.

“[A planning calculator] is not something that we have made available on the site, but we do assist clients with this kind of analysis on a case-by-case basis,” Carey told RIJ. “We’ve found that our clients are less exploratory [than many visitors to annuity sites]. Most come to the site with a specific premium they want to invest or income they want to receive in mind already.”

Technology rules

Other firms have sold income annuities over the Internet to consumers. Through the Fidelity Insurance Network, Fidelity investors can compare customized quotes from six different issuers. At Income Solutions, five annuity issuers compete for new business from individual visitors or advisers. Hersh Stern has been selling income annuities online at immediateannuities.com since 1996.

Nationwide recently tried partnering with a fintech firm on a pilot program selling multi-premium personal pensions online in Arizona, but discontinued that venture over a year ago. Other entrepreneurs, like David Lau of DPL Financial Partners and David Stone of ARIA/RetireOne, as well as SIMON and Halo, have created platforms where Registered Investment Advisors can buy no-commission annuities.

Carey started Blueprint Income (originally called Abaris) in 2014 while he was still a graduate student at Wharton. A stint at the Treasury Department, where he worked with Mark Iwry, a deputy Treasury secretary in the Obama Administration (and creator of the QLAC) got him fired up about the potential for applying fintech to annuities.

“When we adopted the b-to-c (business-to-consumer) model, people told us that it wouldn’t work,” said Carey. “But we now have a viable b/c model. The market is saying it wants an easier annuity buying process. People are looking to buy and not be sold. We grew 200% in past year on the revenue and premium sides. This year we’re well into the hundreds of millions of dollars in premium.”

You might think that consumer ignorance or resistance to annuities might be the biggest obstacle to the success of the b-to-c sales model, but historically there have been obstacles on the insurance company side—with slow processing, demands for paper documents, and long delays between impulse to buy and actual purchase.

So, Blueprint Income appears to have worked as much on streamlining the back-end of the process as on the design of its hip, Millennial-friendly client interface. “Our focus on the software development side has been on the functionality of our quoting software, digital application, and post-purchase policy management,” Carey told RIJ. “For example, the interface we built with Pacific Life that encompasses quoting, digital application, and order entry is a good example of this.”

Carey said that back-end technology is Blueprint Income’s edge. “We grew last year despite the interest rate environment because people are looking to buy and looking to buy in the way we offer,” he added. “It’s a way to do the entire process digitally, with no paper forms or six-week waits. We’re issuing policies in a single day. We’re the only company in the space that’s a software company first and not an insurance distribution company first.”

The 80/20 rule

Larew and Carey are both bullish on direct-to-consumer sales of annuities, despite the low interest rates, which have reduced yields on the most basic income annuities to about 5% for 65-year-olds, and despite the fact that most people aren’t ready to shop for annuities on their own.

“We did the research, and we could see that the reality of direct-to-consumer marketing of annuities has never lived up to its on-paper potential. It’s a complex sale, even for an educated consumer. You’re asking someone to write a large check, and there are psychological barriers to that. We’re not blind to the challenges but we’re very aware of the potential benefits,” Larew told RIJ.

Carey points out that low rates don’t negate the mortality-pooling benefits that come from life-contingent income annuities. “In terms of how interest rates affect annuity sales, the low-rate environment applies to all fixed investments,” he said.

“Unless we’re poised for a future where the risk premium is higher than in the past, people will have fewer options to get yield. One way to get reliable extra yield is from mortality pooling. People tend to think that interest rates will go back up, but we could be in a prolonged low rate environment. It means that they will have to find other sources of yield.”

Most laypersons don’t understand mortality pooling. But AARP is betting that a critical mass of willing annuity buyers exists. On the annuities platform, we’ll be “dealing with members of a segment of the consumer market who are comfortable making their own financial decisions,” said Larew. “In theory, that segment will grow as the advantages of this type of distribution channel becomes clear, as interest in the product grows, and as more people become accustomed to buying financial products direct via digital platforms.”

Carey adds: “We’ve observed that about 80% of the public don’t know about annuities, so you focus on the 20% who do, and you use that as the basis for your growth. Over time, with the Alliance for Lifetime Income publicizing the importance of guaranteed retirement income, and the SECURE Act making it easier to put annuities in 401(k) plans, there’s been a strong nudge. This is all creating a tailwind for us. Twenty percent is a large enough customer base to build a business on.”

A Marvel of Financial Engineering

Posted on May 14, 2020 by Kerry Pechter -

Issuers of fixed indexed annuities (FIAs) generate returns for contract owners based mainly on the movement of equity indexes. By purchasing options on the indexes with part of the income they glean from investing client money in bonds, they can capture some—but not all—of the index growth.

Low interest rates and high market volatility are headwinds for FIA issuers. Low rates can squeeze the issuer’s budget for buying option. Volatility can drive up the cost of options. But, internally, FIAs contain many levers and dials that an issuer can manipulate to burnish a product’s curb appeal.

Two powerhouses of the FIA world, AIG Life & Retirement and Scottsdale-based Annexus, a designer and distributor of FIAs, use almost every possible tool to enhance X5 Advantage, a new FIA with a non-optional lifetime income benefit. AIG’s American General Life subsidiary is the issuer.

The X5 Advantage orchestrates a symphony of deferral bonuses, a long surrender period, embedded fees, leverage, risk-sharing negative floors, assumed lapse rates, volatility-managed indexes, caps, participation rates, spreads and finely-tuned age-based payout rates to serve a surprising number of purposes.

With only a small bit of skin, indirectly, in the equity markets, X5 Advantage aims to satisfy the revenue needs of the life insurer, the distributor, the agent/adviser, and—eventually—to mitigate a client’s market risk, sequence risk, mortality risk, longevity risk and nursing home risk.

Impossible? Not if you hold it long enough. Like a tough cut of beef that becomes fit for a king if you cook it for a long time at a low temperature, this product aims to turn the little that the market offers right now into a feast for everyone involved. It’s a marvel of financial engineering.

Bonuses are the key

X5 Advantage has two stages: An accumulation stage that starts at purchase, and an income stage that starts no less than 10 years later, at the end of the surrender period. During the accumulation stage, the client gets interest credits based on the performance of options on volatility-managed equity indexes from PIMCO, Morgan Stanley or S&P.

The payout rate doesn’t reach 5% of the benefit base until age 70 for a single person (4.5% for a couple), but there are bonuses. During the accumulation stage, the benefit base (equal to the premium at the time of purchase) rises by 200% of each year’s earnings. During the payout stage, the benefit base rises by 150% of the annual earnings.

Here’s how AIG illustrates the product in its brochure. John, a 60-year-old who plans to retire at age 70, funds his X5 Advantage with a $100,000 premium and chooses a 10-year strategy with two five-year terms. Ten years later, his account value is $165,772. But, thanks to the annual bonus, his benefit base has grown to $247,937.

At age 70, and not before, John begins drawing an annual income of 5% of the benefit base, or almost $12,400. The benefit base, and the income stream on which it is based, both keep growing after income begins, by the aforementioned 150% of annual credited interest. These are better terms than a deferred income annuity (DIA) with 10-year deferral period could promise. Anecdotally, that’s partly because FIAs have higher lapse rates than DIAs, which are virtually illiquid.

If John becomes ill and needs nursing home care, he can receive double the usual income amount for up to five years. There are two death benefit options. If John died at age 70, for instance, his beneficiaries could get either his account value ($165,772) in a lump sum or his benefit base ($247,937) in five annual payments of $49,587 each.

Participation rates, spreads and risk-sharing

Those are the bonuses. What about the caps and participation rates on the interest crediting methods? The issuers carefully manage the portion of the index gains the FIA owner can lock in at the conclusion of each one-year, five-year, or ten-year crediting term.

And what about the indexes? In this case, the three custom indexes all contain volatility controls that can dampen the index gains from the inside and take out the market spikes.

Contract owners can get exposure to the Morgan Stanley Expanded Horizons Index, the PIMCO Global Elite Markets Index and an S&P 500 Daily Risk Control 7% USD Excess Return Index. The box below lists the current crediting rates, according to AIG’s product rate sheet.

From the X5Advantage Rate Sheet

As an example of volatility control, let’s compare the S&P 500 Daily Risk Control 7% USD Excess Return with the traditional S&P 500 Index. The risk-controlled version has a net one-year return of 3.87% while the traditional version has a one-year return of 2.31%. The “Excess return” part of the index name reflects the fact that the investment is leveraged; the contract owner gets the portion of the return (3.87% in this case) that was in excess of the cost of borrowing money to do the leveraging.

Looking again at the box above, you can see more of the dials and levers that allow the issuer to fine-tune the risk/return proposition. For instance, two of the crediting strategies have 1% “spreads.” That means the contract owner would get the participation rate (100%, 60% or 40%, depending on the strategy) of the index return minus 1%.

Both the five-year and 10-year strategies have a minus-5% floor on possible losses in any one-year or two-year term within a crediting period, respectively. (But a negative return for the entire crediting period is guaranteed not to occur.) This risk-shift to the client allows the issuer to advertise slightly higher caps by shifting some of the investment risk to the client.

The one-year strategies have participation rates that are less than 100%. If the index gained seven percent, for instance, the client gets either 45% or 60% of 6% (2.7% or 3.6%) depending on which index he or she chose. The one-year option also has a 1% spread, which is subtracted from the credited interest. It also has participation rates, which are alternatives to caps.

To protect the issuer, the rates are subject to change by the issuer at the end of each crediting period. To protect the client, there are guaranteed minimums. The five-year crediting strategies have a minimum participation rate of 50%, a maximum spread of 3%, and a minimum index term floor of -10%. The one-year point-to-point crediting strategies have a minimum participation rate of 25% and a maximum spread of 3%. The ten-year crediting strategies have a minimum participation rate of 50% and a maximum spread of 3%.

As good as it gets

The past dozen years have been tough for annuity issuers. With low bond yields reducing the return on their fixed income assets, but a booming equity market, they’ve had to create products, such as variable and index annuities, that tap into the bounty of the long bull market. It creates a lot of complex engineering to interface an insurer’s general account with the equity markets without violating any state or federal regulations.

For indexed annuities to do a lot with a little, they also need time. But as long as the contract owner holds onto the contract and follows its rules, several of his or her major retirement risks will be addressed. For near-retirees who can’t afford a fee-based adviser, products like the X5 Advantage may be as good as it gets under current market conditions.

Why the World Has a Dollar Shortage, Despite Massive Fed Action

Posted on May 14, 2020 by Daniel Lacalle -

How can the Fed launch an “unlimited” monetary stimulus with congress approving a $2 trillion package and the dollar index remain strong? The answer lies in the rising global dollar shortage, and should be a lesson for monetary alchemists around the world.

The $2 trillion stimulus package agreed by Congress is around 10% of GDP and, if we include the Fed borrowing facilities for working capital, it means $6 trillion in liquidity for consumers and firms over the next nine months.

The stimulus package approved by Congress is made up of the next key items:

Permanent fiscal transfers to households and firms of almost $5 trillion.

Individuals will receive a $1,200 cash payment ($300 billion in total).
The loans for small businesses, which become grants if jobs are maintained ($367 billion).
Increase in unemployment insurance payments which now cover 100% of lost wages for four months ($200 billion).
$100 billion for the healthcare system, as well as $150 billion for state and local governments. The remainder of the package comes from temporary liquidity support to households and firms, including tax delays and waivers.
Finally, the use of the Treasury’s Exchange Stabilization Fund for $500 billion of loans for non-financial firms.

To this, we must add the massive quantitative easing program announced by the Fed.

First, we must understand that the word “unlimited” is only a communication tool. It is not unlimited. It is limited by the confidence and demand of US dollars.

I have had the pleasure of working with several members of the Federal Reserve, and the truth is that they know it is not unlimited. But they know that communication matters.

The Federal Reserve has identified the Achilles heel of the world economy: the enormous global shortage of dollars. The global dollar shortage is estimated to be $13 trillion now, if we deduct dollar-based liabilities from money supply including reserves.

How did we reach such a dollar shortage? In the past 20 years, dollar-denominated debt in emerging and developed economies, led by China, has exploded. The reason is simple, domestic and international investors do not accept local currency risk in large quantities knowing that, in an event like what we are currently experiencing, many countries will decide to make huge devaluations and destroy their bondholders.

According to the Bank of International Settlements, the outstanding amount of dollar-denominated bonds issued by emerging and European countries in addition to China has doubled from $30 to $60 trillion between 2008 and 2019. Those countries now face more than $2 trillion of dollar-denominated maturities in the next two years and, in addition, the fall in exports, GDP and the price of commodities has generated a massive hole in dollar revenues for most economies.

If we take the US dollar reserves of the most indebted countries and deduct the outstanding liabilities with the estimated foreign exchange revenues in this crisis… The global dollar shortage may rise from 13 trillions of dollars in March 2020 to $ 20 trillion in December … And that is if we do not estimate a lasting global recession.

China maintains $3 trillion of reserves and is one of the best-prepared countries, but still, those total reserves cover around 60% of existing commitments. If export revenues collapse, dollar scarcity increases. In 2019, Chinese issuers increased their dollar- denominated debt by $200 billion as exports slowed.

Gold reserves are not enough. If we look at the main economies’ gold reserves, they account for less than 2% of money supply. Russia has the largest gold reserves versus money supply. China’s gold reserves: 0.007% of its money supply (M2), Russia’s gold reserves: about 9% of its money supply.

As such, there is no “gold-backed” currency in the world. The best protected—in gold—the Ruble, suffers the same volatility in commodity slump and recession times as others due to the same issue of US dollar scarcity, although not even close to the volatility of those Latin American countries that face both falling US dollar reserves and a collapse in demand from their own citizens of their domestic currency (as in Argentina).

The Federal Reserve knows that it has the largest bazooka at its disposal because the rest of the world needs at least $20 trillion by the end of the year. So it can increase the balance sheet and support a large deficit increase of $10 trillion and the US dollar shortage would remain.

The US dollar does not weaken excessively because the rest of the countries are facing a huge loss of reserves while at the same time increasing their monetary base in local currency much faster than the Federal Reserve, but without being a global reserve currency.

Second, the accumulation of gold reserves of the central banks of the past years has been more than offset in a few months by the increase in the monetary base of the world-leading countries. In other words, the gold reserves of many countries have increased but at a much slower rate than their monetary base.

The Federal Reserve knows something else: In the current circumstances and with a global crisis on the horizon, global demand for bonds from emerging countries in local currency will likely collapse, far below their financing needs. Dependence on the US dollar will then increase. Why? When hundreds of countries try to copy the Federal Reserve printing and cutting rates without having the legal, investment and financial security of the United States, they fall into the trap that I comment in my book, “Escape from the Central Bank Trap: How to Escape From the $20 Trillion Monetary Expansion Unharmed” (Business Expert Press, 2017). A country cannot expect to have a global reserve currency and maintain capital controls and investment security gaps at the same time.

The ECB will likely understand this shortly when the huge trade surplus that supports the euro collapses in the face of a crisis. Japan learned that lesson by turning the yen into a currency backed by huge dollar savings and increased its legal and investment security to the standards of the US or UK, despite its own monetary madness.

The race to zero of central banks in their monetary madness is not to see who wins, but who loses first. And those that fail are always the ones who play at being the Fed and the US without the US’s economic freedom, legal certainty, and investor security.

The Federal Reserve can be criticized, and rightly so, for its monetary madness, but at least it is the only central bank that truly analyzes the global demand for US dollars. In reality, the Fed QE is not unlimited, it is limited by the real demand for US currency, something that other central banks ignore or prefer to forget. Can the US dollar lose its global reserve position? Sure it can, but never to a country that decides to commit the same monetary follies as the Fed without their analysis of real demand for the currency they manage.

This should be a lesson for all countries. If you fall into the trap of playing reserve currency and endless printing without understanding demand, your US dollar dependence will intensify.

https://mises.org/wire/why-world-has-dollar-shortage-despite-massive-fed-action

Public pensions are not a drag: Study

Posted on May 7, 2020 by Editorial Staff -

Public pension funds generating $179.4 billion more in state and local government revenues than taxpayers put in 2018, according to a biennial study by the National Conference on Public Employee Retirement Systems.

Public pensions’ financial impact rose 30.6% from $137.3 billion in 2016, according to a new study, “Unintended Consequences: How Scaling Back Public Pensions Puts Government Revenues at Risk.” The 2020 edition of the study builds on NCPERS’ 2018 analysis of how investment and spending connected to pension funds affects state and local economies and revenues.

The analysis draws on historical data from public sources including the U.S. Census Bureau, Bureau of Economic Analysis, and Bureau of Labor Statistics. While pension fund assets are invested globally, the economic impact of these investments can be traced down to individual states based on the NCPERS study methodology.

“If public pensions didn’t exist, policy makers would need to increase taxes on their constituents to sustain the current level of public services,” said Michael Kahn, NCPERS’s research director and the study’s architect. He noted that in 40 states, pensions were net contributors to revenue in 2018, an increase from 38 states in 2016.

The original Unintended Consequences study in 2018 examined how state economies and tax revenues are affected when pension funds invest their assets and retirees spend their pension checks, and how taxpayer contributions compare to revenues, said Hank H. Kim, executive director and counsel of NCPERS.

“Pensions are often cast as a pawn in political dramas over short-term spending,” Kim said in the release. “This study underscores that breaking faith with public pensions is actually a costly strategy for state and local government. In the long-term, diminishing public pensions will backfire.”

NCPERS’s analysis of the data also showed:

The economy grows by $1,372 for each $1,000 of pension fund assets. The size of pension fund assets—$4.3 trillion in 2018—means that the impact of this growth is greatly magnified, the study found. Investment of public pension fund assets and spending of pension checks by retirees in their local communities contributed $1.7 trillion to the U.S. economy.

Economic growth attributable to public pensions generated approximately $341.4 billion in state and local revenues. Adjusting this figure for taxpayer contribution $162 billion yields pensions’ net positive impact of $179.4 billion.

Founded in 1941, the National Conference on Public Employee Retirement Systems (NCPERS) is the largest trade association for public sector pension funds, representing more than 500 funds throughout the United States and Canada with more than $4 trillion in pension assets.

New index options on Allianz Life indexed variable annuity offer high three-year caps

Posted on May 7, 2020 by Editorial Staff -

Allianz Life has issued longer-term index options on its Index Advantage variable indexed annuity, with a 20% downside buffer and cumulative caps on appreciation of as much as 80% over three years.

Investors can choose to link their accounts to the performance of either the large-cap S&P 500 Index or the small-cap Russell 2000 Index. The three-year crediting rate limits are 75% and 80%, respectively, according to a May 4 product rate sheet. The current rates expire June 1, 2020.

On the upside, clients have a one-time opportunity between contract anniversaries to lock in a gain in the value of the contract for the rest of the term. The contract can lose value if the three-year term ends with a cumulative loss of more than 20%.

The product has a 1.25% annual contract fee, a $50 annual maintenance free on contracts worth less than $100,000, and (if applicable) a maximum anniversary value death benefit fee of 20 basis points.

The one-year index option of the Index Advantage has different indexes, crediting rate limits, and buffers or floors, as shown in the chart below.

Source: Allianz Life.

The Short and the Long of the Fed Buying Corporate Bonds

Posted on May 7, 2020 by Ruta Ziverte -

By enhancing liquidity and improving functionality in the corporate bond markets, new U.S. Federal Reserve (Fed) programs have been good news in the short term. Yet a number of unknowns remain regarding the rollout of these programs, and we foresee potentially challenging impacts for more highly levered companies over the longer term.

The Fed’s Rapid and Aggressive Actions

The Fed has rapidly deployed its tools to improve liquidity and stabilize markets that were rocked by the economic impact of COVID-19.

The Fed’s efforts, announced on March 23, included new programs that allowed the purchase of corporate bonds, aiming to enhance the flow of credit to corporations.

The central bank established two credit facilities. Through the first, the Primary Market Corporate Credit Facility (PMCCF), the Fed can buy new-issue investment-grade bonds with maturities of up to four years. Through the second, the Secondary Market Corporate Credit Facility (SMCCF), the Fed can buy secondary-market investment-grade corporate bonds with maturities of up to five years as well as exchange-traded funds (ETFs) that invest in investment-grade corporate bonds.

On April 9, the Fed dramatically increased the size and scope of these facilities. It raised their combined size to $750 billion, and expanded both programs to include recently downgraded corporate issuers that had previously been rated investment grade (a BBB-/Baa3 rating or higher) as of March 22—so-called “fallen angels.” The Fed also said it could buy high-yield ETFs through its SMCCF.

In addition to these programs, the Fed has rolled out many other initiatives to improve market functionality and liquidity, including emergency rate cuts and quantitative easing (QE) programs.

With serious concerns about liquidity and stability in all areas of the fixed-income market, the Fed has taken a more aggressive stance than it did during the Global Financial Crisis, combining QE with other initiatives all at once rather than sequentially.

The Short Term

While the Fed has announced programs geared at purchasing corporate bonds, to date it has not actually made these purchases. Still, its programs have already had a positive effect on corporate credit spreads.

Through April 8, for example, the Fed’s corporate bond programs (the PMCCF and SMCCF) caused investment- grade spreads to tighten by 120 basis points (bps) and high-yield spreads to tighten by 229 bps from their widest levels on March 23 (the day the Fed launched these programs). This is notable because spreads reflect the difference in yield between a Treasury and a corporate bond, where widening is typically perceived as default risk rising.

In addition to leading to spread tightening, the Fed’s announcement led to a surge in new investment-grade bond issuance, led by high-quality credits, in March.

Corporate spreads continued to tighten after the Fed’s April 9 announcement, increasing the size and scope of these facilities and including fallen angels and high-yield ETFs (in the case of the SMCCF).

Even though ETFs only represent approximately 3.5% of the high-yield market, this announcement boosted investor sentiment, driving investors to high-yield bonds. As a result, the high-yield new-issue market reopened after essentially being closed in March.

The Long Term

There are still many unknowns surrounding the Fed’s foray into corporate debt. It remains unclear when the Fed will begin buying corporate bonds, and when it does, at what pace the purchases will take place. Our current expectation is sometime in May. More details will likely be announced in the coming weeks.

These facilities are likely to remain active through September, but the ultimate length of the programs will depend on the path of the recovery, which is a big wild card. We see the recovery likely being staggered, but it is not easily predicted given that a virus-driven, global economic downturn is unprecedented.

We do expect, however, that corporate leverage will rise across the board as companies see their earnings

decrease and sell more debt to raise funds. We expect this to result in more downgrades.

This process has already begun. This year more than $120 billion of investment-grade bonds have been downgraded to high-yield status, and we see the potential for much more as the year progresses. Approximately $300 billion of BBB-rated debt in the investment-grade sector is on watch for downgrades or has a negative outlook set by rating agencies.

We estimate that as much as $200 billion of debt (about 3.7% of the investment-grade market) could be downgraded over the next 12 to 18 months, placing it into the fallen-angel category.

We expect these fallen angels to be heavily concentrated in the energy and manufacturing sectors. But other sectors—including leisure, transportation, and consumer products—also have sizable debt that is on watch for downgrades by rating agencies. Those sectors may be hit as well.

We anticipate seeing downgrades across the full rating spectrum: A-rated credits downgraded to BBB, BBB credits downgraded to BB, BB credits downgraded to B, and so on.

Increased leverage will likely lead to more defaults and bankruptcies, especially for companies that entered this downturn with already-high leverage levels. We expect these bankruptcies to be concentrated among companies with lower-B and CCC ratings as well as companies in cyclical sectors, particularly energy. Oil prices at today’s historically low levels are uneconomical for a high-yield company.

Overall, we don’t expect the Fed’s programs to provide much support for lower-quality credits given the expected fundamental deterioration.

Implications

In sum, the Fed’s aggressive actions have benefited the markets in the short term. Longer term, however, we think there will be downgrades, defaults, and bankruptcies, particularly among companies that came into the downturn with high leverage.

In this environment, we are being more defensive, seeking value in high-quality investment-grade credit. There will be plenty of time to increase risk as we come out of the downturn—but for now, there are simply too many unknowns.

Ruta Ziverte is head of fixed income for William Blair. This article first appeared here.

What it means when ETFs deviate from NAVs: Cerulli

Posted on May 7, 2020 by Editorial Staff -

Deviations in the market price of fixed-income exchange-traded funds (ETFs) from their net asset values (NAV)—one of the concerns most widely cited by financial advisers—occurred several times in March, according to the latest issue of the Cerulli Edge–U.S. Asset and Wealth Management Edition.

“COVID-19 is putting fixed-income ETFs to the test,” the report said. “The deviations underscore the importance of educating advisors about the distinctions associated with both the ETF and mutual fund vehicles with the goal being advisors’ use of both in concert.”

In late February, as the markets began to react to coronavirus, some of the largest fixed-income ETFs traded with increased bid-ask spreads and, at times, significantly below their NAVs. This deviation may force ETF investors to sell their shares below the reported value of holdings at a time of crisis, making the vehicle appear to be a poorer option than a comparable mutual fund that transacted at the NAV.

While this may suggest that investors in the mutual fund vehicle were better served, Cerulli associate director Daniil Shapiro warned that, “This deviation in NAV should be interpreted with nuance and should impact how both ETFs and mutual funds are positioned to advisors.”

Why did ETFs fall below the NAV in February? At the highest level, ETF trading is supported by market makers and authorized participants who need to ensure that their activities are profitable and will add a margin of safety, resulting in lower ETF prices and investors effectively paying some price for access to liquidity.

Alternately, since NAVs for many fixed-income positions are “marked-to-model,” the share price may need time to catch up to the true value of the underlying holdings—a friction that market makers will try to price in.

“For advisors, the takeaway should be that no vehicle is perfect. Each has unique advantages,” wrote Shapiro in the new report. “If discounts exist in an ETF vehicle offering similar exposure, advisors purchasing a mutual fund as a long-term holding may be overpaying and would be better served in an ETF.

“Investors who do not need intra-day liquidity but may need to sell at a specific date may well be best served by the mutual fund. They may avoid paying some liquidity charge should they have to sell during a tumultuous period.”

$7.5 Trillion Fiscal Response to COVID-19 (Worldwide)

Posted on May 7, 2020 by No Author -

We Could Use Some Inflation

Posted on May 7, 2020 by Kerry Pechter -

My bank’s small business loan officer called me yesterday. In normal times, the bank calls only when a fraudster in Texas or the Ukraine abuses my debit card number. But this time, she just wanted to chat. So I asked her about the Paycheck Protection Program (PPP).

Our small community bank has made about 9,000 PPP loans so far, she said. Then she asked if I’d like to borrow up to 10 weeks of income, forgivable if spent on payroll. It didn’t matter that I was self-employed and would just pay myself. She emailed me a loan application.

A lot of Benjamins are in motion. On Monday, the U.S. Treasury announced that it would borrow $2.999 trillion in the current quarter and another $677 billion in the fall. Even in wartime, the Treasury has never borrowed more than $1.8 trillion in a year.

There are several ways to think about this money. It’s not like the old, indestructible, intrinsically valuable money, like the 1921 ‘Walking Liberty’ silver dollars I collected. Like gold itself, this commodity money feels reassuring in the hand. It’s also the easiest to remove from circulation.

The country’s money is also a creature of credit. It appears when governments spend and banks lend. It disappears when taxes are collected and loans are repaid. It can be fickle too: A market correction can erase half of a country’s savings overnight—and put a billion dollars in one short-seller’s pocket.

The kind of money that the federal government will create this quarter may be the hardest to get your mind around. When private spending slows, the Fed and Treasury fill the hole by borrowing against future tax receipts. As long as the future is infinitely long and the U.S. infinitely rich, our pockets are infinitely deep.

Where does $3 trillion come from?

When I heard that Treasury would borrow almost $3 trillion this quarter, I admit that the floor trembled a little under my feet. So I emailed a laconic macroeconomist I know and asked him, Who will buy all those bonds? “Everyone,” he replied. Would all that borrowing-and-spending cause inflation, I asked. “No,” he wrote.

Hoping for more information, I called Vanguard and talked to Gemma Wright-Casparius, who manages Vanguard’s active Treasury and inflation-linked (TIPS) bond funds. “It’s a big circular handoff,” she explained.

Asset managers like Vanguard, pension funds, life insurance companies, foreign central banks and individuals buy Treasuries to fund government expenditures. The expenditures become deposits (liabilities) in U.S. banks, which need to add cash reserves for them. The Fed furnishes those reserves by buying Treasuries from the banks. “The capital is going from one pocket to another,” she told me.

In theory, the Fed could buy IOUs directly from the Treasury, and leave the private sector out of the loop. But then money wouldn’t circulate through the financial system and the private economy would stop. That still leaves the question of inflation: Won’t an infusion of $4 trillion or $5 trillion this year into a $22 trillion economy drive up prices?

Not if it replaces money that’s gone. Wright-Casparius said that the 2020 stimulus, despite its size, won’t be immediately inflationary because it’s filling a vacuum—the financial crevasse that suddenly opened up in the U.S. economy when 20-odd million people stopped earning money and paying bills in April.

“In the long run, when economies are fully reopened, you could get a synchronized resurgence of global growth,” she added. “Depending on how long policy makers leave the stimulus in the system, it might be inflationary. “But the Treasury is only borrowing money for a limited period of time. By 2022, projections indicate they’re planning to unwind the stimulus.” (It’s not clear exactly how the training wheels will be removed.)

Then I reached out to Barry Eichengreen, a macroeconomist at the University of California at Berkeley and author of How Global Currencies Work (Princeton, 2017) and other books about money. I asked him where the Treasury could get so much money so fast.

“If you are asking, ‘Where will the Treasury get the money to run a $5 trillion deficit this year?’ the answer goes as follows: It will sell bonds.” To make sure an over-supply of Treasuries doesn’t drive down their prices and raise interest rates, “the Fed has a program in place to prevent ‘disorderly conditions’ in Treasury bond markets,” he said. That is, the Fed will step in as a buyer.

“So the question then becomes: Is this money-printing inflationary? Does the Treasury effectively ‘get the money’ by running inflation (what economists would refer to as ‘imposing an inflation tax’)? There is much debate about this at the moment among macroeconomists,” he continued.

“I would caution against mindlessly succumbing to the instinctual reaction that ‘money-printing is always and everywhere inflationary,’” he wrote. “Some macroeconomists warned that the Fed’s extraordinary actions starting in 2008-9 would cause an explosion of inflation, and they were wrong. The Fed has consistently been unable to get inflation up to its modest 2% target despite the unprecedented peacetime expansion of its balance sheet from 2008 to 2019.”

Why doesn’t the extra money cause inflation? “After a crisis, households ‘deleverage’ (they save rather than spend),” he said. “Firms are cautious about committing to ambitious fixed investment plans in the presence of uncertainty about the nature of the post-crisis environment. So the money the Fed creates (the cash it ‘prints’) mainly sits idle in individual and corporate savings accounts (and in retirement savings accounts). Whether and for how long this will continue is the question that is being debated.”

Tax increases versus inflation

Googling for more information about Treasury sales and inflation, I found articles by Chris Brightman, the partner of Rob Arnott at Research Affiliates, Olivier Blanchard of the Peterson Institute for International Economics, and Tim Duy, a University of Oregon economist who writes the FedWatch blog.

Brightman was the most inflation-wary of anyone I heard from. “Some combination of tax increases and spending cuts following the coming recovery will become necessary to prevent a spike of inflation,” he wrote recently. “Will Congress understand precisely when to execute this fiscal U-turn? Will our politicians display the required foresight and courage? I worry. A future bout of high and volatile inflation may prove to be a toxic side effect of today’s experimental economic medicine.”

But Olivier Blanchard forecasts only a 3% risk of inflation. “One may still worry that, when social distancing is relaxed, pent-up demand will lead to a burst in spending, and some inflation. If it happens, it is unlikely to be large and long enough to destabilize inflation expectations, and it is likely to disappear quickly,” he writes.

Tim Duy agrees that deflation is the bigger threat. “It was common early in the crisis to view the viral outbreak as a supply shock because, from the U.S. perspective, it appeared to be largely impacting the flow of goods from China. This original view suggested an inflationary impact from the virus,” he wrote at Bloomberg Opinion last week.

“The demand-side impact, however, now clearly dominates the economic outlook. Shutting large portions of the economy resulted in a collapse in spending and surging unemployment,” Duy observed. “Yes, in comparison to the dismal second-quarter numbers, the third quarter will likely bounce as some activity returns. This bounce, however, will not be sufficient to lessen the gaping hole in demand left by the virus.”

As for myself, I haven’t decided whether or not to apply for that PPP loan from my bank. I hesitate to borrow—no matter how “forgivable” they say the debt will be. But if this crisis lasts long enough, I might wish I had.

Advisers feel confidence and caution, survey shows

Posted on April 30, 2020 by Editorial Staff -

Financial advisers generally feel confident in their abilities to weather the current crisis, but they feel some pressure on their own revenues and profitability and are uncertain about the future, according to a new report from the syndicated research firm Practical Perspectives.

The report is based on a survey of 525 independent advisers, full-service advisers and Registered Investment Advisors (RIAs). It was conducted during the first week of April 2020 by Practical Perspectives CEO Howard Schneider, who has been tracking adviser sentiment for many years.

The most common portfolio adjustments by advisers were to raise cash allocations, shift money from more aggressive stocks to less volatile, dividend-paying stocks, and decrease equity allocation overall, the survey showed.

Full service advisers (60%) were the ones most likely, by as much as 10 percentage points, to raise cash allocations. Independent advisers (44%) were most likely to shift toward dividend-paying stocks and RIAs (39%) were most likely to reduce equity exposure generally.

Regarding the future, “Nearly three in four advisors, or 74%, believe markets will be higher compared to end of March 2020,” Schneider’s report on the survey said. “However, a plurality of advisors expect the improved return will not recapture the full extent of the decline and performance will still be negative year-to-date six months from now.

“Only one in 10 advisors are optimistic that markets will recover and be positive for the year six months from now,” the report added. “An additional one in six advisors expect a recovery in markets to be flat for the year by end of September. A similar share of advisors are more pessimistic and expect markets to be lower over the next six months.”

While most advisors said that social-distancing and quarantining haven’t hampered their ability to serve clients, “they do acknowledge the negative impact upon key practice metrics, notably revenues and profitability,” the report said. “How a projected decline in the financial strength of advisor practices plays out over time may accelerate consolidation and the exodus of small practitioners from the industry.”

For a copy of the report, click here.

Companies with Resistance to COVID-19

Posted on April 30, 2020 by Editorial Staff -

Just as healthier people seem to resist the COVID-19 virus better, the share prices of financially healthier companies fell relatively less during the market crash last month, according to an analysis by academics at the Haas School of Business at the University of California at Berkeley and in Hong Kong.

In their paper, “Corporate Immunity to the COVID-19 Pandemic,” Ross Levine of Berkeley, Wenzhi Ding and Chen Lin of Hong Kong University, and Wensi Xie of the Chinese University of Hong Kong pointed out that, even as the S&P 500 Index fell by 34% in the first quarter of 2020, the damage varied significantly from firm to firm, even among those in the same industry.

Examining data from more than 6,000 companies in 56 economies, the analysts found certain characteristics common to the hardier companies:

Stronger pre-2020 finances (more cash, less debt, and larger profits)
Less exposure to COVID-19 through global supply chains and customer locations
More CSR (Corporate Social Responsibility) activities
Less entrenched executives (indicated by absence of takeover defenses)
Less large block ownership (>5% of shares) by hedge funds
More large block ownership by non-financial firms (a sign of long-term investments from strategic partners)

Ross Levine

“The traits of firms were common knowledge,” Levine told RIJ. “How the market would price them once a pandemic hit was not known. Fundamentally, there are debates about the sign and importance of CSR, executive entrenchment, board structure, executive compensation, and ownership on a corporation’s resilience to adverse shocks. The response to the pandemic helps determine which theories about corporate resilience actually hold in practice.”

Cash and leverage levels, not surprisingly, mattered a lot. “Comparing two otherwise similar firms, the low-cash firm—the firm with one standard deviation lower pre-2020 ratio of cash-to-assets—would experience an almost 6% (of the sample mean weekly stock return) extra drop in its stock returns in response to the same COVID-19 shock,” the paper said.

“Using a similar comparison, a high-leverage firm (one standard deviation greater pre-2020 leverage than an otherwise similar firm) would experience an extra 10% (of the sample mean value of weekly stock returns) drop in stock returns according to our estimates,” the authors added.

Companies where hedge funds owned big stakes were also more vulnerable. “Hedge funds sell their shares rapidly in response to negative information about COVID-19 cases, intensifying downward pressure on prices, while owners with long-run, strategic commitments to firms (including large corporations), tend to dampen the adverse impact of the pandemic on stock prices,” the paper said.

“Hedge funds might be more focused on pursuing short-run stock performance and engaging in high-frequency trading than other blockholders,” it continued. “As a result, they might be more likely to sell shares quickly in response to news about COVID-19, generating downward pressure on the prices of companies in which they are large shareholders.”

Good corporate citizens and companies with a home-market focus also fared relatively well in the crash. “CSR investments strengthen the informal ties between a firm and its workers, suppliers, customers, and other stakeholders, enabling the firm to more effectively and efficiently work with those stakeholders, and enhance the firm’s likelihood of survival and future success,” the academics wrote.

They added that “the stock price of the more internationally exposed firm would fall by 3.25 percentage points more than the less exposed firm over two months” and that “stock prices in economies with a larger proportion of the population aged over 65 have experienced much sharper declines.”

Investors also appeared to recognize that a country’s “legal traditions” can be correlated with stock prices.

“Firms in economies with French, German, and socialist legal traditions experienced milder stock price declines than those with a common law tradition,” the paper said. “To the extent that legal origin captures state vs. individual/court power, these results suggest that markets viewed states with more power as better able to address the public health crisis, mitigating stock price declines.”

RIJ asked Levine how inclusion in index funds, and the systematic risk that they confer on stocks in the index, might have affected the price volatility of individual stocks. He replied that causality tends to run in the opposite direction. “In general, when index funds simply buy and hold a particular weighted portfolio of stocks, and those weights do not change frequently, stock prices are determined by those who do trade,” he said.

Information spreads like a virus

In their research paper, “Feverish Stock Price Reactions” to COVID-19, Stefano Ramelli and Alexander F. Wagner compare the spread of the investment panic to the spread of the virus, dividing the panic into three stages: Incubation (January 2-17, 2020); Outbreak (January 20-February 21); and Fever (February 24-March 20).

The authors use data from corporate earnings calls, Google keyword searches, and stock price movements, to reconstruct the spread of investor anxiety about specific corporate characteristics—a company’s degree of globalization, leverage, sensitivity to quarantines and social distancing—as the virus progressed.

During the “outbreak” phase, investors and analysts were mainly worried about a firm’s degree of exposure to international supply chains. As the crisis progressed to the fever stage, they became more concerned about a firm’s degree of leverage and lack of liquidity.

Like Levine, et al., the authors of this paper observe that highly leveraged companies with low cash reserves were the most vulnerable—and therefore benefited most from the Federal Reserve’s actions.

“The Fed announcement to purchase newly issued bonds and loans on the primary market can be expected to support firms running low on cash because it means that they can effectively raise funds immediately from the Fed. The announcement to purchase outstanding corporate bonds and exchange-traded funds (ETFs) on the secondary market can be expected to support firms with high leverage,” they wrote.

Honorable Mention

Posted on April 30, 2020 by Editorial Staff -

Money market funds win, alternatives lose in Q1 2020: Cerulli

Investor fear and uncertainty fueled a flight to equity index funds and money market funds and away from other equity mutual funds and exchange-traded funds (ETFs) in the first quarter of 2020, according to a new issue of The Cerulli Edge–U.S. Monthly Product Trends.

Highlights from the report include:

In total, investors pulled about $320 billion from mutual funds and ETFs during March, although passive U.S. equity ($40.9 billion) was exempt from the general trend. The demand for passive U.S. equity likely stems from investors reallocating to low-cost equity index-tracking products to take advantage of bargains.
Asset managers suffered double-digit asset declines, with mutual funds falling 13.6% and ETFs declining 12.4% in March. Net flows out of the vehicles totaled $335.2 billion, or 2.2% of February month-end assets.
The decline in ETF assets was softened by the fact that investors held steady on a net basis, adding $9.3 billion in positive flows into the vehicle during March. Fixed-income ETFs struggled in March, suffering $20.7 billion in net negative flows. Alternative ETFs gathered significant flows YTD, especially relative to the small size of the category ($46 billion).
Money market funds received net flows of $684.7 billion, raising assets 19% to $4.3 trillion. Taxable money market funds added $823.5 billion, while tax-free and prime bled $3.0 billion and $135.9 billion, respectively. The discrepancy in flows highlights investor demand for safety of government-backed securities.
Despite a few bright spots for alternatives, Cerulli said the performance of key liquid alternatives categories in 1Q 2020 as well their long-term performance relative to stock and bond funds make them “a tough pitch.” One bright spot has been managed futures funds, which, after a long period of poor returns, were flat in 1Q 2020. Managed futures showed the lowest five-year correlation to equity markets.

Average tax-deferred retirement balance down 19% in Q1 2020: Fidelity

The major market downturn in March caused average 401(k), IRA and 403(b) balances to drop substantially across Fidelity Investments’ more than 30 million IRA, 401(k) and 403(b) accounts in the first quarter of 2020, according to an analysis by the Boston-based retirement giant.

The average 401(k) balance was $91,400, down 19% from the record high of $112,300 in Q4 2019. The average IRA balance was $98,900, a 14% decrease from last quarter. The average 403(b)/tax-exempt account balance was $75,700, down 19% from last quarter. (Note: Median account values, not provided, are typically substantially lower than average account values.)

Despite those setbacks, contributions to retirement accounts persisted, according to Fidelity. The average 401(k) contribution rate was 8.9% in the first quarter, consistent with Q4 2019; 15% of 401(k) participants increased their contribution rate in the quarter. The analysis also showed:

The average employer contribution was 4.7%, up from 4.6% in the previous quarter and equal to 4.7% in Q1 2019.
The average contribution to an IRA in Q1 2020 grew to $3,330, up 10% from the average in Q1 2019.
Contributions to 403(b)/tax exempt account increased to 6.9%, up from 5.6% in Q4 2019 and 5.4% a year ago.
The number of newly opened IRAs reached a record 407,000 in Q1 2020, up 36% over Q1 2019.
The number of Millennials contributing to IRAs increased 41% over last year, while the amount contributed by Millennials increased 64%.
Among female Millennials, the number of IRAs increased 20% from Q1 2019.
The number of Roth IRAs among Millennials increased 41% over the last year, with the amount of Roth IRA contributions growing 64%.
Only 7.3% of individuals changed their 401(k) allocation, up from 5.2% in Q4 2019.
Of savers who made a change, 60% made only one change in the quarter.
Among Baby Boomers, 9.9% changed their 401(k) allocation, with most moving their savings into a conservative investment option.
Among those with 403(b)/tax-exempt accounts, 5.2% changed their allocation, up from 4.1% last quarter.
Only 3% of participants in Fidelity’s 401(k) and 403(b)/tax-exempt platform dropped their allocation to 0% equities.
Hardship withdrawals increased slightly, but new 401(k) loans dropped. Before the CARES Act passed in late March, only 1.4% of individuals took a hardship withdrawal from their 401(k) in Q1 2020, less than half a percentage point more than the 0.9% in Q1 2019.
Only 2.3% of 401(k) participants initiated a loan in Q1, down from the 2.6% in Q4 2019 and even with 2.3% in Q1 2019. Individuals did not draw significant funds from their retirement accounts in the first quarter.

Average daily customer calls from Fidelity’s retail and workplace investors increased 20% in Q1 2020 versus Q1 2019, and Fidelity’s new COVID-19 resource centers received nearly one million views through the end of the quarter.

Lincoln Financial waives retirement plan withdrawal, loan fees

Lincoln Financial Group is taking steps to support customers experiencing COVID-19-related financial challenges, including relief for retirement savers, flexibility for policyholders, and support for the community and business.

In support of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Lincoln Financial is waiving eligible withdrawal and loan initiation fees. Lincoln’s team of retirement consultants are providing one-on-one support by phone or online.

Additionally, Lincoln is sharing educational materials and hosting webinars to help plan participants decide whether a loan or withdrawal is the right option for them and understand how it might affect their long-term goals.

Kevin Kennedy named CMO at Pacific Life Retirement Solutions

Kevin Kennedy has been named senior vice president, sales and chief marketing officer of Pacific Life’s Retirement Solutions Division, which had more than $14 billion in 2019 sales of fixed and variable annuities, structured settlements, and retirement plan annuities.

Kennedy will oversee the division’s sales and marketing organization with oversight for sales execution and analytics, strategic partner and asset manager relationships, structured settlements, and expansion into the registered investment advisor (RIA) market.

Before joining Pacific Life, he was managing director and head of individual retirement at AXA Equitable Holdings, where he was in charge of product design and pricing, business strategy, and distribution of the individual retirement product line.

CBO Economic Forecasts 2020 – 2021

Posted on April 30, 2020 by No Author -

Income annuity sales plunge

AIG adds new index to its Power Series FIAs

DPL Financial Partners will distribute no-commission VA from Transamerica

NextCapital to provide ‘managed advice’ to MassMutual plan participants

Great American enhances its Index Frontier contracts

The Fed’s Rapid and Aggressive Actions

The Short Term

The Long Term

Implications

Where does $3 trillion come from?

Tax increases versus inflation

Information spreads like a virus

Money market funds win, alternatives lose in Q1 2020: Cerulli

Average tax-deferred retirement balance down 19% in Q1 2020: Fidelity

Lincoln Financial waives retirement plan withdrawal, loan fees

Kevin Kennedy named CMO at Pacific Life Retirement Solutions

Data Connection

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