Prudential Cuts Fees Across 11 VA Funds
June 30, 2017 by Grace Jennings-Edquist
Prudential has cut investor costs on a number of actively managed funds sold through the firm’s variable annuity products in a move that could reflect the dampening impact of the Department of Labor’s fiduciary rule on sales of such products, one industry analyst notes. So reports Ignites.
The management fee waivers affect 11 funds that collectively represent about $30.2 billion within the insurer’s Advanced Series Trust. Subadvisors to the affected funds include Baltimore-based T. Rowe Price; Legg Mason’s Pasadena, Calif.-based Western Asset Management and New York-based ClearBridge affiliates; Greenwich, Conn.-based AQR; New York-based Goldman Sachs; and Cohen & Steers, which is also in New York, regulatory filings dated June 26 show.
Five of the affected funds are managed by T. Rowe Price, which also renegotiated the rates it collects as a subadvisor to Prudential, a separate filing reflects.
Under the new breakpoint schedule, T. Rowe’s rate will be reduced by 2.5% on combined assets up to $1 billion. The rate continues to fall in increments until assets reach $10 billion, at which point the subadvisory fee falls by as much as 12.5%, filings indicate. The disclosure does not spell out the various starting subadvisory fees T. Rowe collects on the strategies.
The largest of the T. Rowe Price-run products — and in fact of any of the 11 included in the latest rounds of Prudential’s reductions — is the AST T. Rowe Price Asset Allocation Portfolio, which Morningstar reports has assets of $15.1 billion. The AST T. Rowe Price Large-Cap Growth Portfolio, meanwhile, represents $2.3 billion. The T. Rowe Price Large Cap Value Portfolio, Growth Opportunities Portfolio and Natural Resources Portfolio represented $1.1 billion, $838.4 million and $497.8 million, respectively, company documents show.
Such fee waivers could also reflect relationship-based pricing, says Jeffrey Strange, managing director of U.S. research at Strategic Insight. “Basically in the case of T. Rowe, [Prudential might be saying], ‘We’re big partners, we’ve consolidated some of these portfolios, you’ve gained assets over time’,” he says. “They’re driving down fees a little bit just to make the economics work a little better until the VA market rebounds.”
Newark, N.J.-based Prudential declined to comment on whether it renegotiated contracts with managers on the other six funds but says all the changes are an attempt to make the products more attractive to investors.
“We have constant oversight of our investment platform and seek to enhance our customer value proposition through better performance opportunity and lower cost,” says Ken Allen, vice president of Investment Management at Prudential Annuities, in an emailed statement.
The most dramatic fee change is to the expenses of the $1.4 billion Goldman Sachs Mid-Cap Growth Portfolio, which has introduced a 10 basis point fee waiver. The AQR Large-Cap Portfolio now has a 9 bps fee waiver. That product represented about $2.9 billion as of Dec. 31, according to company documents.
Changes to the five funds subadvised by T. Rowe Price took effect June 1, while changes to the other funds will take effect July 1.
The reductions indicate broader sensitivity toward fees in the market generally, says Strategic Insight’s Strange.
“The DOL [rule] has dampened VA sales,” he says. Consistent markets have also affected investor appetite, since the products are typically promoted as a means to protect assets against risk. “[T]hey just haven’t had a capital market environment that has showcased their benefit.”
All but two of the 11 funds — the T. Rowe Price Large-Cap Growth and Large-Cap Value funds — had have had outflows year to date to May 31, 2017. The T. Rowe Price Asset Allocation Portfolio bled $248 million during the first five months of the year, following outflows of $611 million in 2016 and $375 million in 2015, Broadridge data indicate. The second-biggest bleeder was the Western Asset Core Plus Bond Portfolio, which has had outflows of $200 million year to date, following redemptions of $454 million in 2016 and $483 million the prior year.
Industrywide, sales of variable annuity contracts fell from more than $123 billion in 2015 to just over $100 billion in 2016, partly in response to the DOL fiduciary rule, according to a Morningstar report. During the fourth quarter of 2016, VA sales fell by more than 20% from the same quarter in 2015, as previously reported.
Despite their recent rough patch, VA products could have another moment in the sun, Strange suggests. “The conundrum is same thing with liquid alts and managed volatility: You don’t need it until the time for you really needing it has passed.”
