The Markets September 27, 2011

Russell Paper Outlines Volatility-Responsive Asset Allocation

Russell Investments’ latest research for institutional investors explores the possibility of a dynamic asset allocation policy that varies as market volatility changes.
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The underlying principle described in “Volatility-Responsive Asset Allocation” is to reduce exposure to risky assets when volatility is high, and to increase that exposure when volatility is low. Russell believes that a volatility-responsive asset allocation policy – which needs to be as systematic and disciplined as any other strategic policy – can lead to a more consistent outcome and a better trade-off between risk and return for institutional investors.   

“Market volatility is itself volatile. Markets can be relatively stable at some points in time and explosively volatile at others,” said Michael Thomas, Head of Consulting and Chief Investment Officer, Americas Institutional, and one of the paper’s authors. “Given this fact, a strategic asset allocation policy is no longer necessarily a set of fixed weights that are held constant until the next review, because the associated risk can be highly variable over time. Rather, a strategic asset allocation policy can be designed to respond to changes in the investor’s experience or to changes in market valuations.”   

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According to the authors (Thomas, Bob Collie, Chief Research Strategist, and Mike Sylvanus, Senior Investment Strategist), the foundation of a strategic asset allocation decision is a trade-off between risk and reward. Volatility is an appealing foundation for a dynamic strategy because, unlike the outlook for returns – which are notoriously difficult to forecast – investors can be relatively confident in their assessment of the volatility environment. One reason for this confidence is that changes in volatility are more persistent than changes in returns.   

Researchers looked at U.S. equity and U.S. fixed income, as represented by the Russell 3000 Index and the Barclays Capital U.S. Aggregate Bond Index. The simulation covered the period January 1979 – June 2011, the timeframe for which data on the Russell 3000 is available. (The strategy starts once 60 days’ return data is available from which to calculate trailing volatility.) The volatility-responsive strategy produced lower volatility than the fixed mix of 50% equity and 50% fixed income, and its volatility was more stable and predictable. There was also no return penalty over the period analyzed; the volatility-responsive strategy delivered an average 40 basis points higher return after accounting for trading costs.  

The paper is available at http://www.russell.com/institutional/research_commentary/vraa.asp.
Data & Research September 27, 2011

Study Offers Ways to Close Life Insurance Coverage Gap

Life insurance coverage is at its lowest point in more than five decades, according to a research project undertaken by Genworth Financial and the University of Virginia.  
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According to the 2011 Genworth LifeJacket Study, “7 Key Insights to Help Close the Coverage Gap,” almost half of Americans with household incomes between $50,000 and $250,000 do not have life insurance; those with insurance have only enough to cover 3.6 years of income.

Genworth developed the LifeJacket research project in collaboration with Dr. Gregory B. Fairchild, of the University of Virginia. According to the findings, Americans want to work with an agent or adviser to understand the role of life insurance in securing their families’ futures. Additionally, 40% of consumers do not believe they have enough life insurance to meet their families’ long-term needs. The study illustrates that financial professionals should change the way they approach their client base and break down the barriers that keep families from obtaining adequate coverage.

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“While the industry has done an excellent job of offering products that meet the consumer needs, we now have the deep insight needed to bridge the coverage gap and bring consumers to the table – creating a more effective way of doing business,” said Anthony Vossenberg, senior vice president, Life and Annuities at Genworth. “This study provides advisers and agents with insights needed to educate consumers about their insurance needs and motivate them to secure their financial futures.”

More than 60% of those who currently own life insurance said they wanted to meet with their adviser at least once a year. However, of those who want that frequency of contact, only 38% indicate that they are actually receiving it.

Life transitions, such as marriage, purchase of a home or the birth of a child, are periods for reevaluation and reflection, says Genworth. However, the LifeJacket research revealed that the time between the "trigger event" and actual purchase varies widely, depending on the event. There is an opportunity for financial professionals to shorten the timeframe between life transitions and purchases by reestablishing connections and providing consumers greater control in the educational process.

The research also found that clients want an annual life insurance review that is fast and efficient, and those who receive one report having a stronger relationship with, and more trust in, their adviser. Seventy-seven percent of respondents indicated that they don't expect a lengthy annual review - an hour or less will do. Those who are receiving an annual life insurance review (47%) have the highest level of trust in their adviser.

Of those who own life insurance today, one-third purchased their policies more than 10 years ago, indicating the possibility that life insurance needs may have changed for a large population of consumers since initial purchase.

Almost all beneficiaries in the study (94%) indicated they needed additional life insurance coverage in order to maintain their standard of living. Forty-three percent of respondents have used life insurance income to pay outstanding debts/loans, even though only 33% intended to do so. Another 48% indicated insurance benefits are used to pay for basic living expenses, while only 32% expected to use it for such a purpose.

Over the course of 2010 and 2011, Genworth and Dr. Fairchild conducted a variety of quantitative and qualitative research studies. Genworth's customer insights team either interviewed participants or worked with outside research firms to develop, launch and interpret results for 240 participants (ages 18+) for qualitative research and 25,445 participants (ages 18+) in the quantitative research.

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