Uncapped index annuities as an alternative to bonds

I recently attended a lecture with Roger Ibbotson, an emeritus finance professor from Yale business school, and had the opportunity to speak with him afterward. Ibbotson recently completed extensive historical research on the performance of bonds versus uncapped index annuities.

Traditionally, index annuities placed caps or limits on upside performance. Uncapped index annuities do not place an upside limit on the returns of the annuity and therefore may allow contract owners to receive higher returns. Based on that research, he made the following conclusions: The first was that given today’s low-interest-rate environment, bonds that derive returns from interest payments and either capital gains or losses are unlikely to perform as well in the next 10 years as they have in the past.

Moreover, if interest rates rise, the return from bonds could be negative. Secondly, over the last 90 years, uncapped fixed index annuities would have outperformed bonds on an annualized basis. Finally, these annuities offer a narrower risk profile than bonds as they capture a portion of the upside offered by large cap stocks, without investment risk.

Ibbotson, who is CEO of a hedge fund called Zebra Capital Management, said that his research also indicated that large cap stocks that are “less popular” tend to have less volatility and higher returns then stocks that are getting more notoriety and have higher trading volume. His company has created a rules-based index comprised of stocks with less popular names and lower volatility.

As far as appropriate asset allocation, Ibbotson said that he still believes in 60/40 portfolio designs but that “the 40 percent isn’t necessarily bonds because bonds could have poor performance going forward.” He concluded that index annuities allow for low risk equity participation with principal protection. Therefore, investors should consider using uncapped index annuities instead of bonds as the conservative portion of their portfolio.


Keith Singer

Keith Singer, a well-known financial advisor in Florida, is both a CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioner and a licensed Florida attorney.

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