Regulators digging into the widening scandal of abusive trading of mutual funds have turned their attention to variable annuities. And with good reason.
Based on the slew of money moving into and out of dozens of international funds within variable annuity accounts, the arena may have been a gold mine of questionable trading that took money right out of the pockets of long-term annuity investors.
Variable annuities -- a group of investment offerings, typically mutual funds, wrapped inside an insurance contract that guarantees part of the holder's investment -- seem to reside at the opposite end of the investment spectrum from go-go arbitragers and market-timers. The average participant is 65 years old, and 53% of annuity accounts hold less than $100,000, according to the National Association for Variable Annuities, an industry trade group. However, industry participants and watchers say a growing number of institutional clients have jumped into variable annuity contracts in recent years for market-timing purposes, because such contracts allow investors to move freely among funds on a tax-deferred basis.
In recent weeks, the curtain has been getting pulled back on questionable trading activity in funds with variable annuity accounts. Putnam, a unit of Marsh & McLennan (MMC - Get Report), disclosed that its Variable Trust funds saw some market-timing in December 2002 and January. Meanwhile, the Securities and Exchange Commission sent letters to insurance companies that offer annuities, such as Hartford Life, Lincoln National, John Hancock and TIAA-CREF, asking about their efforts to combat market-timing and late trading. In the chart below, TheStreet.com flags some suspicious funds within variable annuities.The variable annuity industry, which has about $800 billion in assets under management, maintains that market-timing isn't endemic among its offerings compared with the fund industry. "Market-timing has been around for a while -- as a result, insurance companies have imposed restrictions to curtail it," said Michael DeGeorge, general counsel at the National Association of Variable Annuities. "The industry is on the lookout."
The following funds have redemptions as a percentage of sales more than 10 times the average fund in an annuity, raising red flags on abusive trading
|Name of Fund||Total Net Assets at Year-End 2002 in Millions||Redemptions in Millions||Redemptions as a Percentage of Year-End Assets||Redemptions as a Percentage of Sales|
|Van Eck Worldwide Insurance Emerging Markets Fund||$151.10||$4,660.90||3,085%||99%|
|SunAmerica International DVSD;1||159||2,902.60||1,826||104|
|ProFunds Ultra Small-Cap||53.8||947.5||1,761||104|
|Alger American Small Cap; O||378.9||3,861.30||1,019||100|
|Scudder EAFE Equity Index; A (VIT)||56.7||472.4||833||97|
|SunAmerica International Growth & Income; 1||186.5||1,509.20||809||105|
|Scudder International;A (VAR 1)||412.1||3,274.20||795||101|
|Invesco Dynamics (VIF)||115.8||828.9||716||100|
|Janus Aspen International Growth (SVC)||381||2,520.70||662||102|
|Fidelity Variable Insurance Products (VIP) Overseas; SVS||177.6||1,102.40||621||102|
|United Institutional Funds:Emerging Markets Equity;I||162.3||965.5||595||98|
|United Institutional Funds: International Magnum||68.7||383||558||95|
|Panorama Series Oppenheimer International Growth (NS)||62.8||345.3||550||104|
|Jackson National Series Trust: Putnam International Equity||79||426.4||540||102|
|Franklin Foreign Securities; 2 (VIP)||299.3||1,607.70||537||94|
|ING Partners-JP Morgan Fleming International||279.5||1,487.40||532||102|
|Travelers Series Trust Lazard International||97.9||517.6||529||102|
|Van Eck Worldwide Insurance Hard Assets Fund||97.9||514||525||95|
|AIM (VIF) International Growth; I||247.6||1,290.00||521||104|
|ING (INV): International Equity; S||140||694||496||101|
|Janus Aspen Worldwide Growth (SVC)||192.4||953.3||496||93|
|Hartford HLS International Opportunities; IA||634.8||3,086.20||486||106|
|American Century International (VP)||449.4||2,113.50||470||106|
|Valic (CO) (I) International Equity||82.2||375.6||457||99|
|Penn Mutual International Equity||56||251.8||450||105|
|ING (INV) Developing World;S||63||263||417||102|
|Gartmore Developing Markets; II (VIT)||75.2||287.8||383||106|
|Franklin Developing Markets; 2 X (VIP)||80.9||308||381||95|
|Jackson National Series Trust: Oppenheimer Global Growth||50.9||187.5||368||98|
|Janus Aspen International Growth, Institutional||600||2,159.60||360||103|
|SunAmerica Global Equity; 1||236.9||837.3||353||114|
|Putnam (VT) International Equity; IB||308.3||1,082.00||351||91|
|Credit Suisse International Focus||86.5||289.6||335||115|
|Mainstay (VP) International Equity; INIT||61.8||194.8||315||96|
|ING (INV) AIM CP Mid-cap Growth; S||144.6||451.3||312||111|
|Morgan Stanley European Growth; X||193.3||599.8||310||113|
|Alger American Mid-Cap Growth; O||240.1||740.2||308||101|
|Note: All funds operate on a calendar-year cycle that ended Dec. 31, 2002, except the SunAmerica funds, whose fiscal year ended Jan. 31, 2003, and the Valic fund, with a May 31, 2003, fiscal-year-end.
Source: Lipper, a Reuters company.
"For this chart to be so dominated by foreign funds, it seems very clear that market-timing is going on," said Russ Kinnel, director of fund research at Morningstar, after seeing the chart. "If there were no timing or stale-price arbitrage, then you would see more domestic stock funds because that's what dominates