Read time: 2-minute video

Index Insider: Laurence Black on the value of custom indices

This content is categorized as:

See how risk control custom indices can be an effective part of a fixed indexed annuity, providing stability and reducing volatility

Research shows the value of custom indices

Custom indices have become a popular crediting option for fixed indexed annuities (FIAs). In this video, Laurence Black, founder of The Index Standard®, discusses research conducted for Athene that validates the benefits of using risk control custom indices by analyzing market performance for the last 122 years. His findings include:

  • Custom risk control indices would have outperformed benchmark equity indices during that time;
  • They also would have cushioned downturns during the top 10 drawdowns in the market;
  • These indices are highly efficient which can lead to lower costs and higher participation rates in annuities.

Black says today’s market conditions make custom risk control indices particularly appealing, since they help counter volatility and smooth returns.

Measuring custom indices against historical returns

Adding custom risk control indices to a FIA can reduce volatility and lead to a better performance, according to new research.

A study of the past 122 years of stock market returns, conducted for Athene by The Index Standard®, which researches and rates custom indices, found that a hypothetical risk control index would have outperformed stocks as well as bonds during that time period.

“What we found was that a hypothetical custom risk control index, on a return divided by risk basis, actually outperformed benchmark indices,” said Black.

Among the major findings:

  • A custom risk control index would not only have outperformed the equity benchmark index across the 122 years, but would also have bested it in a decade-by-decade comparison, outperforming it in eight of 10 segments.
  • During the Great Depression the equity benchmark would have dropped 83 percent, while the hypothetical custom index would have only dropped 29 percent.
  • A similar analysis with bonds found a hypothetical $100 annuity with a custom risk control index would have grown to $1,200 over 122 years, while a benchmark bond index would have grown to $300.

Custom indices go back more than 30 years but have grown in popularity more recently because they take a rules-based approach that is transparent and predictable, offering smoother, risk-adjusted growth potential at more stable renewal rates.

“What these custom risk control indices do is give you lots of different exposures,” said Black. “They blend in different regions, they blend in different asset classes like stocks, bonds and commodities. So, they give you this diversification opportunity that you can blend these risk control indices with your major benchmark indices to get stable portfolio returns in an annuity.”

Comparing benchmark indices to custom risk control indices can be difficult, Black adds, like trying to compare two different types of cars. 

“They’re very different. Benchmark indices can be wildly volatile, a little bit like a Mustang and a custom risk control index is designed to cushion and smooth a little bit like an SUV,” he said. “When you compare them, you have to find a consistent metric, like miles per gallon, or in the case of an index, you really want to compare return divided by risk.”

Black said the growing use of custom risk control indices in FIAs is clearly based on their ability to smooth returns and provide more consistent performance. 

“They're like a modern car. They've got lane warning systems and cruise control. They're very efficient and they price well, while benchmark indices can be very volatile with inconsistent pricing and participation rates,” he added. “I think custom risk control indices have become so popular because they're really designed for annuities.” 

Insights on Athene Connect. Tips, tools and resources to grow your business by helping clients retire with confidence.