Managed Risk Funds Seek to Improve Retirement Outcomes | Capital Group

American Funds Insurance Series

December 2017

Managed Risk Funds Seek to Improve Retirement Outcomes by Helping to Limit Losses During Market Declines

At American Funds, we recognize that limiting the volatility of returns and preserving assets may be high priorities for investors who are:

  • Risk-averse,
  • Near, or in, retirement, or
  • Drawing on investment income

For these investors, we offer a diverse set of funds designed to manage volatility and provide downside protection: American Funds Insurance Series (AFIS) managed risk funds.1

Our AFIS managed risk funds combine a diverse asset mix with a dedicated risk management strategy that seek to:

  • Stabilize portfolio volatility 
  • Capture growth in up markets 
  • Defend against losses during sustained market declines 

AFIS managed risk funds may be worth considering for investors with a lower tolerance for volatility who are seeking potentially smoother returns.

Designed to Offer Results That Exchange Some Upside for Potentially Lower Volatility and Limited Downside

Managed risk funds are designed to experience a narrower dispersion of returns compared to a hypothetical stock-heavy mutual fund (grey curve).

A blue bell curve indicating a narrower dispersion of returns when a strategy that seeks to limit volatility and preserve capital is applied to a hypothetical stock-heavy mutual fund shown in grey.

AFIS Managed Risk Funds Seek to Reduce the Impact of Stock Market Volatility and Declines

Each AFIS managed risk fund provides investors a diversified portfolio combined with a dynamic risk management strategy. This combination seeks to generate strong risk-adjusted returns over full market cycles.

Sphere highlighting an AFIS managed risk fund’s core in orange representing portfolio allocation and an overlay in blue representing the fund’s managed risk strategy.

Core: AFIS Portfolio Allocation

The “core” of each AFIS managed risk fund is an allocation among AFIS funds that seeks to achieve a diversified portfolio through investments in multiple asset classes.2

This asset allocation helps manage risk through diversification as each asset class often reacts differently to changing market conditions. The fixed income allocation, for instance, may provide an initial level of protection and cushion against stock market declines.

Overlay: Managed Risk Strategy

In addition to asset allocation, the AFIS managed risk funds integrate an additional approach to risk management that may be appropriate for many investors.

The managed risk strategy3 constantly monitors fund volatility and dynamically adjusts the fund’s equity exposure via exchange-traded  futures4 to seek gains when markets rise and limit losses during market declines with high volatility.

Risk: Monitored Constantly and Managed Responsively

The managed risk strategy consists of two elements: volatility management and capital protection.

Volatility management

… seeks to stabilize portfolio volatility.

Volatility management aims to keep the risk level of a portfolio from increasing significantly during periods of market turbulence.

With that in mind, our managed risk strategy operates within defined parameters and continuously monitors the market to deliver responsive risk management.

If market volatility increases significantly, short equity futures are established to reduce the equity exposure of the fund. In addition, U.S. Treasury futures are utilized for cash and volatility management.

When market volatility declines, holdings of futures are adjusted to restore the equity exposure and preserve market participation.

Capital Protection

… seeks to defend against losses during sustained market declines.

Because sustained market declines can occur without a preceding increase in volatility, our managed risk strategy has an additional risk management capability. When combined with volatility management, this can be very helpful to the investor.

The capital protection element uses short equity futures, and the gains from those positions can help reduce losses during sustained market declines. This protection level, which can be in place with or without the presence of heightened volatility, is monitored and adjusted based on market conditions so that the fund may participate in subsequent recoveries.

In periods of sustained low volatility, there may be no futures position in place, as neither the capital protection nor the volatility management elements may be active.

AFIS Managed Risk Funds Align with a Broad Range of Investment Objectives

AFIS managed risk funds do not eliminate returns volatility or sequence-of-returns risk, but they are specifically designed for investors who would like to reduce these risks. We view these funds as a continuation of our commitment to being aligned with improving investor outcomes.

We offer eight managed risk funds focused on growth, growth and income, high-quality stocks, international stocks or a balance of stocks and bonds. Each fund consists of underlying AFIS equity and fixed income funds, as well as the managed risk strategy overlay.2

Managed risk funds portfolio managers/ Years of experience5
Alan Berro 31
James Mulally 41

Subadviser portfolio manager/ Years of experience5
Adam Schenck 12
Milliman Financial Risk Management

1American Funds Insurance Series managed risk funds are only available within variable annuity contracts issued by insurance companies.

2For the AFIS Managed Risk Asset Allocation Fund, the core portfolio consists only of the AFIS Asset Allocation Fund, which as a standalone fund, is diversified across multiple asset classes.

3Capital Group hired Milliman Financial Risk Management LLC as a subadviser to manage each fund’s managed risk strategy.

4Exchange-traded futures are financial instruments that represent an obligation between a buyer and seller to exchange cash flows based on the movement of an underlying asset such as a market index. Futures may not provide an effective hedge of the underlying securities because changes in the prices of futures may not track those of the securities they are intended to hedge.

5As of May 1, 2017.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the mutual fund prospectuses and summary prospectuses, which can be obtained from a financial professional, and should be read carefully before investing. Similar information about collective investment trusts can be obtained from Capital Group or participants’ plan provider or employer. 

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. 

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. 

Futures may not provide an effective hedge of the underlying securities because changes in the prices of futures may not track those of the securities they are intended to hedge. In addition, the managed risk strategy may not effectively protect the fund from market declines and will limit the fund's participation in market gains. The use of the managed risk strategy could cause the fund's return to lag those of the underlying funds in certain market conditions.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.