Some critics might point out that investing in international markets can be risky, especially for an investment such as an annuity that’s supposed to provide guaranteed income in retirement. While there’s a degree of truth in that, others insist that there’s actually less risk than there used to be.
“The subaccounts are typically [with] best-in-class asset managers with very respectable AUMs,” says Leyva. “They’re popular because they have long-term success. … Advisors are interested in presenting [to clients] annuities with good performance potential.”
Lately, there’s been some potentially compelling performance data. Consider this: In the first three quarters of 2017, while the benchmark S&P 500 gained nearly 13%, equities in the euro-using countries measured by MSCI outpaced the U.S. index by some 10 percentage points. Meanwhile, in the emerging BRIC nations (Brazil, Russia, India and China), equity markets skyrocketed almost 31%.
A fluke, perhaps. Water under the bridge, definitely. But these are just some reasons investors might prefer international stocks over U.S. counterparts, even if it’s through VAs.
Nevertheless, a degree of caution is not unwarranted. “By themselves, international and emerging markets subaccounts are riskier than U.S. equities, due to additional currency and geopolitical risks,” says Chuck Bean, founder and CEO of Heritage Financial Services in Westwood, Mass. “However, strong demographic trends and higher GDP growth in many countries outside the U.S. can offer valuable investment opportunities within a well-allocated portfolio.”
Portfolio Balancing and Rebalancing
He notes that VAs with international investments should be rebalanced periodically. “At retirement, when the investor is looking for income,” says Bean, “this portion of the portfolio should be a modest component of a larger overall investment plan.”
Generally speaking, whether internationally or domestically invested, VAs are not right for everyone. “Variable annuities should only be considered after the investor has maximized contributions to his or her employer-sponsored retirement plan and IRAs,” notes Bean. “If the time horizon is long enough, and they’re in a high tax bracket looking to reduce current income taxes on their non-retirement investment money, low-cost variable annuities can be a good choice.”
Bean only considers low-cost, fee-based VAs that have “no back end charges or extra fees,” he says.
Sizemore agrees. “Clients are more sensitive about fees these days, as they should be,” he says. “So you really have to be careful with all variable annuities, whether international or domestically focused. If your clients are paying a high fee or have a long surrender period, then they had better be getting a lot of value out of it.”