Better than Expected: The Hidden Dynamic of Variable Annuity Funds

Abstract

We study how variable annuity affiliation affects fund performance. We find that VA-affiliated funds outperform pure open-end funds by about 70 basis points four-factor alpha per year in case of actively managed US equity funds. We argue that affiliation with a variable annuity wrapper increases the ability of investors to compare performance of funds offered within the same wrapper. This increases the competitive pressure among fund families. We explain the superior performance of VA-affiliated funds in terms of self-selection: only the better funds are chosen by fund families to be part of insurance wrappers.