The Fixed Indexed Annuity Study from Wharton Professor David Babbel

There is in fact a study from Professor David Babbel that compares the performance of fixed indexed annuities to portfolios of stocks and bonds and it is fascinating.

The study compares the performance of two fixed indexed annuities (FIA) to the following alternative investments:

• Vanguard’s S&P 500 Total Return Fund

• The S&P index used in calculating the FIA’s crediting rates.

• A benchmark portfolio consisting of: a) 50% Vanguard S&P Total Return Fund, and: b) 50% Vanguard Total Bond Market Fund

• A money market index.

While certainly not representative of all asset classes, the alternatives do provide a proxy for broad market performance.

The two fixed indexed annuities have terms of 9 years and 14 years.  Both FIAs have similar issue dates on or around January 1995.

Again, the results are eye opening with the fixed indexed annuities outperforming—in terms of annualized returns and terminal wealth—the alternative investments over every time period.  In some instances the outperformance is dramatic.  The impact of starting dates for the investment portfolios and the subsequent sequence of returns risk is especially noticeable.

I will be communicating some of the study features over the next several days.  There is an accompanying lecture that I first need to digest.

It is important to note that the study is strictly academic and is not intended to be used in any form as a marketing tool.  The study is a result of the collaborative efforts of Professor David Babbel, Dr. Miguel Herce, and Dr. Kabir Dutta.  The results were initially communicated in November, 2008 at an Ibbotson Associates / IFID Centre conference.