MyPlanIQ's  Instablog

In a previous article we summarized some of the major variable annuity products.

During our analysis, it became clear that the collection of funds that make up the subaccounts were well chosen and provide the foundation for a high performance portfolio.

This can be useful for those who already have a variable annuity and want to get the most out of it, or for those who are considering purchasing a variable annuity or for those who want to learn how to put together a good set of fund choices.

In this case we are going to examine Fidelity Personal Retirement Annuity

The Fidelity Personal Retirement Annuity's plan consists of 56 funds. These funds enable participants to gain exposure to 5 major assets: US Equity, Foreign Equity, REITs, Emerging Market Equity and Fixed Income.

Asset Class	Number of funds
US	13
International	5
Sector	12
Balanced	8
Fixed income	7
Emerging Markets	3
Real estate	1
Target Date	7

There are a selection of target date and balanced funds that can be selected but would not be part of an overall portfolio.

The plan rating for this annuity is above average at 85% and the breakdown is:

Diversification	96%	great
Fund Quality	65%	above average
Portfolio Building	90%	great
Overall Score	85%	above average

With five asset classes, diversification is going to be strong.

We will step through each of the asset classes to outline why the fund quality while good is not yet outstanding.
US Funds

LARGE BLEND	FUSVX	Fidelity Spartan U.S. Equity Index
LARGE GROWTH	FCNTX	Fidelity Contrafund
LARGE GROWTH	FSGFX	Strategic Advisers Growth
LARGE GROWTH	FGIOX	Fidelity Advisor Growth & Income
LARGE GROWTH	FAGCX	Fidelity Advisor Growth Opportunities
LARGE GROWTH	EQPGX	Fidelity Advisor Equity Growth
LARGE VALUE	EQPIX	Fidelity Advisor Equity Income
LARGE VALUE	FVLIX	Fidelity Advisor Value Leaders
MID-CAP BLEND	FASOX	Fidelity Advisor Value Strategies
Mid-Cap Growth	FRVIX	Fidelity Advisor Growth Strategies
Mid-Cap Growth	FMCCX	Fidelity Advisor Mid Cap
MID-CAP VALUE	FVIFX	Fidelity Advisor Value
SMALL BLEND	FSCIX	Fidelity Advisor Small Cap

The US funds provide access to large, mid and small cap funds. Large Cap funds are probably overweighted, especially on growth. Having more mid cap value and small cap value would improve the portfolio slightly. Nevertheless, this is a high scoring section. 

International Funds

Foreign Large Blend	FAOIX	Fidelity Advisor Overseas
Foreign Large Blend	WPETX	Credit Suisse Trust Intl Eq Flex
Foreign Large Blend	INLDX	Morgan Stanley International
Foreign Large Growth	FCPIX	Fidelity Advisor Intl Capital App
Foreign Large Value	IVQDX	Morgan Stanley Intl Value Equity
World Stock	FGEBX	Fidelity Advisor Global Cap Apprec

This is a good international section. Large cap are overweighted, medium and small cap funds would be a good upgrade.

Emerging markets

Emerging Markets	FIMKX	Fidelity Advisor Emerging Markets
Emerging Markets	LZEMX	Lazard Emerging Markets Equity Instl
Emerging Markets	MGEMX	Morgan Stanley Emerging Markets

Three alternative funds in this category is a good choice. It may be that having some large or mid-cap blend would provide a good alternative.

Real Estate

REAL ESTATE

FHEIX

Fidelity Advisor Real Estate

Real estate is under represented -- an international REIT would strengthen this asset class.

Fixed Income

Emerging Markets Bond	MSIEX	Morgan Stanley Emg Mkts Debt
High Yield Bond	FHNIX	Fidelity Advisor High Income I
Inflation-Protected Bond	PRRIX	PIMCO Real Return Instl
Intermediate-Term Bond	FBNDX	Fidelity Investment Grade Bond
Intermediate-Term Bond	PTTRX	PIMCO Total Return Instl
Cash	CASH	Money Market
Short-Term Bond	PTLDX	PIMCO Low Duration Instl

The fixed income class is well balanced with good choices and diversification.

Even without going into the balanced funds, there are enough funds here to build a solid portfolio. 

While the managed funds are available, the fee structure is such that the returns are going to leak into other people's pockets and it will pay you to be on top of your own investments -- either directly or through a professional.

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA, both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical 5 asset SIB (Simpler Is Better) plan. This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity: SPY or VTI
Foreign Equity:  EFA or VEU
REITs : IYR or VNQ or ICF
Emerging Market Equity :EEM or VWO
Fixed Income :AGG or BND

Performance chart (as of Nov 15, 2010)

Performance table (as of Nov 15, 2010)

There is an opportunity to build good returns and benefit from the tax free gains while mitigating the known high fees of this type of instrument.

There are certainly the funds in the plan to make this possible and overlaying a tactical asset allocation is empowered by the range and richness of the funds.
 

Disclosure: No Positions