Simply looking at the historical performance of mutual fund subaccounts within a variable annuity contract will not necessarily give you an accurate picture of their true performance. It is often necessary to look at the actual mutual fund performance outside the contract.
If you are trying to decide whether to invest money in a variable annuity, one of the key factors you should consider is the historical performance of the mutual fund subaccounts. However, these numbers can be misleading.
When you look through the performance history of many mutual fund subaccounts that are offered in variable annuity contracts, it is easy to become confused. For example, an investor looking at the performance history of the Franklin Income fund within a variable contract offered by U.S. Allianz, will not see the same data that appears for the fund on the Franklin Funds website.
A comparison is necessary in order to obtain an accurate picture of a fund's performance. The SEC has mandated that when a mutual fund company offers one of its funds through a variable annuity contract, the resulting subaccount must be registered as a separate security, with a separate name, ticker symbol and a separate performance history.
This, of course, leads to tremendous confusion among novice investors, who may have a favorite fund that a variable carrier claims to offer within their contract. But when the investor looks for the fund within the contract's list of offerings, it is seemingly not there, because its name and ticker symbol have been changed.
Call the annuity carrier and find out the name of the subaccount that corresponds to your chosen fund. For example, say you want to invest in a variable annuity that offers the Franklin Templeton Founding Funds Allocation fund (ticker symbol FFALX). First, you will find a carrier with a variable annuity that offers this fund, such as the U.S. Allianz Alterity variable annuity.
If you look through the subaccount selections hoping to find this fund, you will discover that it is not there; instead, there is a fund called the Franklin Templeton VIP Founding Funds Allocation fund that is actually your fund in disguise. Sometimes the fund names will be very similar with just a word or two added or subtracted, and other times they will be much harder to match.
Look at the subaccount's inception date. The Franklin Templeton VIP Allocation fund subaccount within the Alterity annuity, for example, lists the inception date as 07/02/07, and the total return through 09/30/07 as 4.8 percent.
Go to Franklin Templeton's website and look at the original fund upon which the subaccount is based and you will discover that on the contrary, this fund was incepted on 08/15/2003, and has an average annual total return of over 12 percent. The subaccount history can only tell you what the fund has done since it was added to the annuity as a subaccount, not what it has done since it truly began. This disparity can be very misleading for those who are not familiar with the differences between mutual funds and variable annuity subaccounts.
- Always check variable annuity subaccount performance against the performance of the underlying fund.
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