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CONTRIBUTORS

Ryan Poirier, ASA, CFA, FRM

Director, Index Products and Research Salt Financial

Alexander Gropper

Head of Structuring and Quantitative Investment Strategies Salt Financial

Doug Sue

Head of Insurance, Retirement & 529 Solutions, Americas
Franklin Templeton Investment Solutions

Vaneet Chadha, CFA

Portfolio Manager

Preview

This paper was written with Salt Financial.
 

Executive summary:

  • More sophisticated strategies have become available to annuitants due to volatility control, while keeping the main aspects of what makes these products compelling—upside market participation and principal protection.
  • We discuss how volatility targeting, embedded in fixed index annuity (FIA) benchmarks, provides expanded diversification and more consistent and typically higher Participation Rates; this may boost interest credits as a result.
  • Multi-asset volatility-control indexes provide annuitants the potential for better risk-adjusted returns.

Credit: interest paid to the annuitant based on changes in the reference index.

Cap rate: a limit on how much an annuitant may receive in any given year. For example, a 5% cap limits a credit to that amount, regardless of how the reference index may have performed.

Participation rate: the percentage of market upside that is credited to an annuitant. For example, a 70% participation rate on a 10% market return equals a 7% credit to the annuitant.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.  During times of extreme market volatility, any index will not be able to eliminate market losses or capture all market gains.

IMPORTANT DISCLOSURES:

It is not possible to invest directly in an index. There is no assurance that investment products based on any index will accurately track index performance or provide positive investment returns. There is no guarantee that any strategies utilizing any index will be effective or successful. Multi-asset indices and diversification do not promise any level of performance, success, or guarantee against loss of principal. This does not serve as an offer to sell or a solicitation of an offer to buy any product or security or the use or suitability of any index. This information should not be relied upon as investment advice, research, or a recommendation by Franklin regarding (i) any products tied to any index, (ii) the use or suitability of any index, or (iii) any security in particular.

Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor. Individuals seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.

Index-linked annuities are insurance contracts issued by an insurance company. Index-linked annuities are not invested in any index itself, but rather interest is credited based on the performance of the index and the rules prescribed in the insurer’s index crediting strategy. Index-linked annuities are not issued by Franklin.

Simulated returns and pre-inception data are hypothetical and included for illustrative purposes only.

ADDITIONAL DISCLOSURES

Exhibit 3 methodology: The S&P 500 option pricing are derived from historical interest rates, the VIX, and the dividend yield of the S&P 500. The dividend yield of the S&P 500 is derived by subtracting price return from the total return of the index. The first 3 years of the VIX used for this chart consists of backtested info obtained by the Chicago Board Options Exchange (CBOE), pulled from their website. The Volatility Target option pricing is ultimately derived from the work on our backtesting on the vol control index, applying the 5% volatility target.

HYPOTHETICAL PERFORMANCE

Hypothetical performance results may have inherent risks. No representation is being made that any account will or is likely to achieve profit or loss. The relevant market and economic conditions that prevailed will not necessarily reoccur. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be accounted for. All hypothetical results are presented for illustrative purposes only. Hypothetical and past performance is no guarantee of future performance.

Back-testing and other statistical analysis material that is use simulated analysis and hypothetical circumstances to estimate how it may have performed prior to its actual existence. The results obtained from "back-testing" information should not be considered indicative of the actual results that might be obtained from an investment or participation in a financial instrument or transaction referencing these indices. Franklin Templeton does not provide assurance or guarantee that the products linked to indices will operate or would have operated in the past in a manner consistent with these materials. The hypothetical historical levels have inherent limitations. Alternative simulations, techniques, modeling or assumptions might produce significantly different results and prove to be more appropriate. Actual results will vary, perhaps materially, from the simulated returns presented in this document. The hypothetical performance information presented herein does not reflect the results of actual trading and calculation of index levels and performance do not reflect the fees and expenses that an investor would pay. These fees and expenses would cause the actual and back-tested performance of any index to be lower.

Salt Financial LLC collaborates with Franklin Templeton to develop bespoke systematic strategies aimed at growing the Fixed Index Annuity (FIA) market, leveraging Salt’s patent-pending truVol® Risk Control Engine and Franklin Templeton’s more than seven decades of portfolio management experience. Salt Financial LLC provides index solutions and risk analytics, powered by their truVol® Risk Control Engine. They leverage the information contained in intraday prices in an attempt to better estimate volatility to develop index-based investment products for insurance carriers, investment banks, asset managers, and ETF issuers. Franklin Templeton and Salt Financial LLC are not affiliated companies.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Franklin Templeton has environmental, social and governance (ESG) capabilities; however, not all strategies or products for a strategy consider “ESG” as part of their investment process.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

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