Variable annuities that use outside management firms represent more than one-third of the assets in the variable annuity market, are growing rapidly and are dominating industry sales, according to a study released last month.

Externally-managed variable annuities accounted for $237 billion, or 36 percent, of the total assets under management in the variable annuity market as of June 30, according to Financial Research Corp. of Boston, a financial services tracking and consulting firm.

The assets in externally managed variable annuities - variable annuities with subaccounts that are run by money management firms unaffiliated with the variable annuity sponsor - have grown at a rate of 52 percent since Dec. 31, 1995, according to FRC. That compares with a 25 percent growth rate for proprietary variable annuities, annuities in which the firms managing money in the variable annuity are affiliates of the company selling the variable annuity. Externally-managed variable annuities accounted for 100 percent of the net sales of variable annuities through the first six months of 1999, according to FRC.

The popularity of externally-managed variable annuities is due in part to the fact that it is easier for intermediaries to persuade potential contract owners to buy a variable annuity with recognized money managers running sub-accounts, said Raymond Liberatore, the FRC analyst who wrote the report. The brand name of the outside investment managers in a variable annuity and the external managers' investment performance have become keys to the successful sale of variable annuities, Liberatore said.

FRC's analysis was included in its 1999 Externally Managed Variable Annuity Report which the firm released on Oct. 4. FRC expects to issue the report annually. It was released for the first time this year.

The message that outside managers can help the sale of variable annuities is not lost on the industry. Externally-managed variable annuities offer intermediaries and investors more choice of recognized investment managers, variable annuity and broker-dealer executives said. Externally-managed variable annuities also help insure that sponsors can offer variable annuities with sub-accounts that cover all investment styles and asset classes, said Michael Gilotti, executive vice president of Phoenix Variable Life Insurance Co. of Hartford, Conn. Phoenix has added three unaffiliated managers to its variable annuity product so far this year, bringing the total it uses to seven.

"I have a better opportunity to increase market share with an array of styles and names," Gilotti said.

The use of external money managers is not new. Nationwide Financial Services of Columbus, Ohio began offering The Best of America variable annuity in 1982, the first in the industry using unaffiliated money managers. The popularity of external managers has grown significantly in the past two years, however, according to FRC. Sales of externally-managed variable annuities accounted for 61 percent of sales in 1997 and 70 percent in 1998, FRC reported.

There has been what FRC described as a significant concentration of assets among brand name investment managers running externally-managed accounts. The top ten largest external investment managers control 64 percent of externally-managed variable annuity assets, according to FRC.

According to FRC, the top five external managers and assets as of June 30 are Wellington Management of Boston with $39.1 billion; Fidelity Investments of Boston with $34.4 billion; Janus of Denver, Colo. with $20.4 billion; T. Rowe Price Associates of Baltimore, Md. with $11.9 billion; and Deutsche Asset Management of New York with $9.7 billion.

The use of variable annuities in which one company primarily or entirely manages the sub-accounts is not dead, however. Advisors with LPL Financial Services of Boston, for example, sell variable annuities in which a single firm manages the sub-accounts, said Sheila Curran, vice president of annuity marketing for LPL. Single-manager variable annuities, which MFS Investment Management of Boston and Putnam Investments of Boston manage, are among those popular with LPL representatives because of comparatively low expenses, service and the positive reputation of the firms, Curran said.

"I'd be the last to say that the single manager VA is a dinosaur," Curran said.

Although there is a concentration of assets among larger firms, variable annuities present a distribution opportunity for smaller money management firms, FRC said. Money managers such as Marsico Capital Management of Denver and Fred Alger Management of New York have grown through variable annuity distribution during the past three years because of their performance records, according to FRC.

"Although brand' name is a critical factor for success within the variable annuity marketplace, there is still room for the smaller, strong-performing investment manager to increase its number of external investment management assignments along with its asset market share," according to the report.

Performance was an advantage for externally-managed variable annuities, according to FRC. Externally-managed domestic equity, international and fixed-income sub-accounts performed better than their proprietary counterparts during one-, three- and five-year periods, according to FRC. The performance for externally-managed funds is superior to proprietary funds even taking into account higher expense ratios for the externally-managed funds, according to FRC. The exception to the performance trend lies in money market accounts where externally-managed variable annuities trailed proprietary variable annuities, according to FRC.

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