Sitting On The Sidelines: Savings Rates Are Up. Sales Of Fixed Annuities Have Skyrocketed
Feb. 22--In the age of high-flying hedge funds and huge returns, playing it safe was the last thing on many investors' minds. Parking money in any sort of savings account, with its paltry returns, or fixed annuity just didn't seem very smart. And it certainly wasn't sexy.
But after the market collapsed last fall, investors' appetites changed. Suddenly, investments that offer only modest returns but a greater degree of predictability had a lot more appeal.
Stock mutual funds, variable annuities and asset-backed securities--with their high upsides but dismal downsides--are out. Treasury securities, good old savings accounts and fixed annuities are in.
The flight to 'safety' is likely to continue throughout 2009. But now some investment experts warn that being too cautious might turn out to be a risky strategy.
"People are more interested in the return of their money than a return on their money," said John Beuerlein, chief investment officer at Marquette Asset Management. "The pendulum went too far one way and now it's swinging back too far the other way."
PULLING OUT AT MARKET'S PEAK
Greg Zandlo, president of North East Asset Management in Coon Rapids, thinks a conservative approach makes the most sense right now. Last July, he advised his 75 clients to pull out of the equity markets altogether.
Zandlo said he started to scale back his investors' exposure to the stock market in late 2007, around the time the market hit an all-time high. Those
good times just couldn't be sustained, he decided. Last summer, when he told clients to bail out of stocks, he suggested they invest in short-term corporate notes and municipal bonds and put their money in cash -- certificates of deposits and money markets.
Plenty of other investors and advisers made similar moves
Investors yanked $234 billion out of stock mutual funds in 2008, according to the Investment Company Institute. They kept some money in bond and money market mutual funds, but less than they had a year earlier.
Meanwhile, the national savings rate jumped to 3.6 percent in December, up from 2.8 percent in November and 0.4 percent in December 2007. Wells Fargo, U.S. Bancorp and TCF Financial -- which together hold the bulk of Twin Cities deposits -- all saw deposits rise noticeably in the fourth quarter.
At Minneapolis-based U.S. Bancorp, for example, total deposits, which include savings, money market and checking accounts, increased nearly 10 percent compared with the same period the previous year. At Wells Fargo, which has the biggest deposit market share in Minnesota, and Wayzata-based TCF Bank, deposits climbed 6 percent and 3 percent, respectively, in the quarter.
Even though rates on CDs are hovering near historical lows, Zandlo says, "I'm willing to accept those returns for the safety."
FIXED ANNUITY SALES SURGE
That same focus on preserving assets and predictability is showing up in the annuities business. Kerry Geurkink, marketing director for St. Paul-based Securian Financial Group, noticed the uptick in sales of fixed annuities beginning in July. Financial advisers across the country who had never sold Securian's products before began to place their clients' assets in fixed annuities from the St. Paul insurer.
Sales of fixed annuities at Securian skyrocketed to $158 million last year, a 400 percent increase.
"I haven't seen this dramatic of a shift in fixed annuities before," Geurkink said.
Fixed annuities guarantee a stream of set payments over time. Variable annuities, which had been growing in popularity, offer the potential for higher returns, but are less predictable.
Minneapolis-based Ameri-prise Financial saw a similar spurt, with sales of fixed annuities jumping more than 400 percent to $1.67 billion last year. Nationally, fixed annuity sales were up 41 percent through the third quarter of last year, according to insurance industry group LIMRA. Full-year data will likely reflect an even bigger surge in fixed annuity sales in the fourth quarter, said Gumer Alvero, senior vice president and general manager of RiverSource Annuities for Ameriprise.
Falling CD rates are a big reason why, Alvero said.
Fixed annuity sales tend to jump when one of two things happen, he explained. The first factor is a bear market. The second is low CD rates.
While Ameriprise noticed an upswing in fixed annuity sales as early as the second quarter of 2008 -- when CD rates were in the 3 percent to 4 percent range -- they didn't take off until later in the year, when the Federal Reserve cut the Fed Funds rate to nothing and CD rates fell to about 2 percent.
Fixed annuity sales are even more robust so far in 2009, Alvero said.
Customers for fixed annuities are generally in the 65 to 70 age range. But Alvero suspects more folks in the 55-plus crowd are looking at them now.
"They were saving for retirement and feeling good about it a few years ago," Alvero said. "But now they are concerned with preserving what they have."
RUSH TO SAFETY
History shows that in times of recession, investors seek safety, says Jim Paulsen, chief investment strategist at Wells Capital Management. This time, it appears, that rush to safety was more pronounced.</p>
"We have seldom had this much dry powder sitting on the sidelines with very low asset prices," he said.
And while it's hard to fault people for being cautious after losing so much last year, investment experts warn that there is a definite downside to that strategy.
In a recent talk, David Swensen, Yale University's chief investment officer, cautioned against abandoning the equity markets altogether. Swensen spoke at an event earlier this month hosted by Minneapolis-based money management firm Lowry Hill and the Minneapolis Foundation.
In his chat, Swensen reviewed past market downturns and pointed out that too often, scared investors sell low just to get out of the market.
"In the midst of a financial crisis, only one thing matters: safety," Swensen said.
Investors then sit on the sidelines and are unable to move quickly enough when it's time to jump back in. By the time they realize a comeback is at hand, they're forced to buy in at higher prices just to get a piece of the action.
"If you buy high and sell low," Swensen said. "It's really tough to make money."
Investors need to find a balance between risk and safety, Marquette's Beuerlein suggests.
"It just seems like this is the flip-side of the irrational exuberance in 1999, at which point you couldn't convince anyone that the thing would ever stop going up," said Paulsen. "Today, you can't convince anyone that it will ever stop going down again. I think the right thing to do is lean a little on both ideas."
A cautious Zandlo, however, still isn't ready to so much as dip his toe back into the market. The housing market doesn't appear to have bottomed out and the federal stimulus package will take some time to take hold, he said.
"Opportunities will be there down the road," he said. "Just not yet."
Nicole Garrison-Sprenger can be reached at 651-228-5580.
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