's Transamerica generated $20billion in annuity considerations in 2015, the fourth-most according to S&PGlobal Market Intelligence research.
At the end of March,Transamerica launched three new variable investment options that held a seriesof BlackRock Inc.'siShares smart-beta exchange-traded funds. Todd Rosenbluth, director of ETF andmutual fund research at S&P Global Market Intelligence, in early Aprilspoke to Transamerica AssetManagement Inc.'s chief investment officer, Tom Wald, about thecreation of variable annuities and why it partnered with iShares.
The iShares ETFs that arepart of these variable annuities include iShares MSCI USA Quality Factor (QUAL)and iShares MSCI USA Minimum Volatility (USMV). As of year-end 2015,Transamerica's mutual fund business had $42 billion in assets management.Transamerica Large Cap Value (TWQAX) and Transamerica International Equity(TRWAX) are two of the larger subadvised portfolios supervised by Wald and histeam.
Wald also spoke about whatTransamerica uses when selecting subadvisers for its mutual funds; the companyworks with J.P. Morgan Asset Management, Loomis Sayles & Co. LP and 's QS Investments, amongothers.
The following is an editedtranscript of the conversation.
S&P Global MarketIntelligence: Transamerica has used ETFs within its packaged products foryears. What is the appeal for your firm and the benefits to clients?
Tom Wald: We have a platform thatsupports mutual fund investors, variable annuity sub accounts and for theretirement channel. We have used ETFs as holdings within these mutual funds tomeet investor objectives. We don't do a comparison of mutual funds relative tothe ETFs, but we think ETFs are needed in variable annuity strategies that canbenefit from tax-deferred investing and that can generate better returns over time.
What makes the smart-betaETFs universe appealing to Transamerica?
Wethink smart beta is one of the most exciting areas within investing right now.It hits a sweet spot between passive and active management. Smart betaimplements a rules-based approach to maximize exposure to certain factors thathave a history of generating higher returns or lower risk than traditionalmarket-cap weighted investments. We look at smart beta as a new area that hasnot been packaged as a series of ETFs for variable annuities. The smart-betaETF market has grown significantly to more than $200 billion by the end of2015. But no one has combined different types of these ETFs, tied to minimumvolatility, value, size, quality and momentum, so we think we are breaking newground.
Tell me about theTransamerica products that are now available.
Weput together three different portfolios: Transamerica BlackRock SmartBeta 100,the SmartBeta 75 and the SmartBeta 50. The numbers pertain to the amount of theassets tied to these iShares ETFs with the rest tied to passive fixed-incomeinvestments. The advantage is that by combining different types of smart-betaproducts you are going to have low correlation with one another and can worktogether in a diversified portfolio.
How active is the managementgoing to be?
Wehave a strategic allocation for the overall strategy that will be monitoredthroughout the year and potentially changed on an annual basis. The individualsmart-beta ETFs are rules based and are rebalanced semiannually by BlackRock.
There are other smart-betaETF providers. What made you choose iShares?
BlackRockhad the individual ETFs tied to indices that showed a history of generatingstrong returns and reducing risk. In addition, the firm has a long history ofrunning portfolios so we thought it was a great combination for us.
Let's talk about your mutualfund products. The funds offered by Transamerica are subadvised by someprominent firms. What are some of the criteria your team uses to select andmonitor these managers?
Itis a combination of quantitative and qualitative factors. Within any assetclass or strategy, we begin by looking at what subadvisers have the expertisein the space. We look at their performance records, but this is just thestarting screen. We look for firms with a strong infrastructure and resourcesnecessary to manage the strategy. But we want to understand the ability of thatmanager to repeat the success going forward. For example, what were the economicconditions during this record and whether it was conducive to their style? Itis an ongoing process to make sure they meet the expectations we have andunderstand what has changed at the firm or the management.