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June 12, 1995 01:00 AM

FIRMS TAKING DIFFERENT VARIABLE ANNUITY ROUTE

Marlene Givant Star
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    Some money managers have discovered a clever way to tap the burgeoning variable annuity market.

    Instead of acting as subadvisers, as money managers traditionally have done, these firms are investment advisers. As such, they don't run the risk of being replaced. And, they get to keep the full advisory fee.

    The managers created pools to market to a variety of insurers on a wholesale basis. The portfolios in the pools typically are modeled after their existing retail mutual funds.

    Fidelity Investments, Boston; and Neuberger & Berman, Fred Alger Management and Quest for Value Advisors, all in New York, have been doing this for several years. But now other firms, such as Massachusetts Financial Services, Boston; Federated Investors, Pittsburgh; and Janus Funds, Denver, are getting into the game.

    They are going where the money is. According to Cerulli Associates Inc., Boston, assets in variable annuities have exploded to $160 billion.

    Being an adviser to multiple variable annuities enables firms to attract assets through the distribution arms of many insurance companies.

    When retail mutual funds are used, their insurance clients' proprietary annuities are shareholders in the trust. Or, a firm might form a series fund, and insurers can wrap one or more of the investment portfolios.

    Of course, as an adviser, the trust is responsible for costly filing fees, legal fees, audits, board of directors duties and compliance, unlike a subadviser.

    Lynne Goldman, consultant with Cerulli Associates who co-authored a study on the variable insurance business, said: "A lot of people have done this (managed variable annuities) as subadvisers and are now catching on that this is another way of doing it."

    Being an investment adviser rather than a subadviser enables the money managers to "raise more assets and take a bigger fee and not be subject to an adviser replacing them as a subadviser," she said.

    These are among the firms managing variable annuities as investment advisers:

    Through its VIP Funds, launched in 1982, Fidelity is an investment adviser to $12.136 billion in variable insurance assets for 40 different insurance companies. The firm also launched in January the Adviser Variable Annuity, a group of six funds that has attracted $33 million so far, according to Camille Lepre, a spokeswoman.

    Neuberger & Berman has been in the variable annuity management business since the mid-1980s with a series of funds open to a variety of insurance companies. On May 1, it launched the Neuberger & Berman Advisers Management Trust, adopting a Hub and Spoke structure with software licensed from Signature Financial Group.

    Each spoke is a proprietary product of an insurance company client. There is a master portfolio for each type of strategy from growth to balanced to small cap. Existing client assets are now in the hub portfolio.

    "We think this gives us a lot of new marketing avenues," said Stan Egener, president of Neuberger & Berman Mutual Funds.

    Since 1984, the firm's variable insurance advisory business has grown to $1 billion.

    Fred Alger's Alger American Fund, started eight years ago, is a series trust with six investment options used by insurance companies' variable annuities. Among the six is a leveraged all-cap portfolio, the only one in the variable insurance industry that uses futures and options and leverage, according to Ray Pfeister, executive vice president. The firm has $1 billion in variable insurance assets and expects to bring in another $1 billion for 1995, he said.

    Quest for Value Funds runs $1.4 billion in variable annuities as both an adviser and a subadviser for 10 insurance companies. The advisory clients invest in an "accumulation trust" consisting of their choice of seven portfolios. The firm will add two or three more portfolios in the coming months, said Charles Mazziotti, vice president, Quest for Value Distributors, New York.

    In only one year, Massachusetts Financial Services has attracted 11 insurance companies to its MFS Variable Insurance Trust. The trust, with $33 million, includes 12 portfolios for insurance companies, variable annuities and variable universal life insurance products.

    MFS also is running variable annuity money as a subadviser for five insurance clients.

    "We'll be at $100 million in the subadvisory and variable trust within two months," said Bennett Coleman, vice president.

    In September 1993, Janus launched its Aspen series, a trust that is investment adviser to $219 million in variable insurance monies for eight insurance companies. Janus also offers a proprietary variable annuity product called Janus Retirement Advantage, which invests in Janus funds and has $31.6 million. Insurance is provided by Western Reserve Life Insurance Co., according to Michael Brandsma, extended services manager.

    Federated launched its Insurance Management Series in early 1994 and already runs $50 million for a dozen companies. It will add a seventh investment option later this year, according to Tom Territ, senior vice president and national sales manager of the institutional sales division. The same options are offered in Federated's proprietary variable annuity called Federated Growth Plus, distributed through broker-dealers.

    He said the firm is equally happy to subadvise for insurers, and runs $180 million for three clients - American Skandia, Western Reserve Life Assurance Co. of Ohio Inc. and First Variable Life Insurance Co. Inc.

    Warburg Pincus Counsellors, New York, is registering a variable annuity product, but officials declined to comment until the end of the filing period with the Securities and Exchange Commission.

    Money managers view managing these trusts as a way to broaden their asset base.

    "We're providing a service to variable annuities. We're wholesaling funds for these annuity products," said MFS' Mr. Coleman. "In effect it helps us. They're distributing our funds."

    The trusts also respond to the market's growing demand for multiple managers because they make it easy for insurers to pick and choose portfolios from various firms. Before external management caught on, the dominant variable annuities were proprietary products managed in-house by insurance companies.

    In addition, until the early 1980s, variable annuities were able to invest in retail mutual funds. The Internal Revenue Service later required separate funds for variable insurance products.

    Neuberger & Berman's Mr. Egener said his firm has resisted becoming a subadviser. "I don't think it's a good thing to do. You don't make money on a fund until it's got $50 million," Mr. Egener said.

    Of course, from the insurer's perspective, a subadvisory relationship may be more profitable long term even if the insurer has to shoulder legal and compliance costs.

    "A larger company generally looks toward a subadvisory relationship, with a minimum of $100 million in assets. That's my figure, not a hard and fast rule," said Mr. Mazziotti of Quest for Value. He said his firm, Oppenheimer Capital, New York, probably would not want to be a subadviser for smaller portfolios amounting to, for instance, $10 million over a two-year period. In such cases, the firm would recommend its accumulation trust.

    Mr. Territ agreed. "Insurance companies with tremendous confidence in their distribution strategy will go the subadvisory route .*.*. Someone who wants to enter the variable annuity business quicker with less start-up costs might use a series trust."

    Like Fred Alger, Federated has become a little more selective about its insurance relationships. "Every life company not in the variable annuity business right now wants to be .*.*. Our strategy is to support those companies we're working with from a marketing standpoint," said Mr. Territ.

    "It gets hard when you have so many companies."

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