Protection as an Asset Class
Annuities are contracts that can be arranged to provide various protections to their owners. Often, we think of these protections in terms of the ability to provide lifetime income that can help retirees manage the risk of outliving their assets. But the emergence of structured annuities provides a new direction for protection by changing the relationship between downside market risks and upside growth potential when investing. In either context, it now is possible to frame an annuity, or the protection it provides, as an asset class for households to help manage market risks and the risk of outliving assets. These two complementary frames distinguish protection as an asset class, which we will examine further.
First, we start within an investing framework. We consider how adding a structured annuity, whose returns are linked to a stock market index, as an asset class choice can improve the efficient frontier for investors by providing a better risk-adjusted return. Downside risks are present in both stocks and bonds, as evidenced in 2022 when stock and bond markets both experienced double-digit losses. Near-retirees who are depending on bond funds to maintain the value of their assets may be vulnerable to a rise in interest rates. We will illustrate how structured returns impact the efficient frontier for household portfolios, enhancing the risk-adjusted returns for the overall portfolio relative to holding just stocks and bonds.