Curian set to move into money management

Curian Capital LLC is adding asset management to the menu.

Less than a year after entering the separately managed accounts business with a platform aimed at the lower end of the retail investor market through banking and insurance representatives, Curian is preparing to take over management of about $1.2 billion in variable-annuity-subaccount assets.

The Denver-based company is expected to announce this week its first significant move into the market in the form of a subadvisory relationship with Jackson National Life Insurance Co. in Lansing, Mich.

The deal, which installs Curian’s quantitative-investment-management unit as the manager of 23 of Jackson National’s 55 variable- annuity subaccounts, replaces such subaccount heavyweights as First Trust Advisors LP in Chicago, J.P. Morgan Chase & Co. in New York and Mellon Capital Management Corp. in San Francisco.

Curian and Jackson National are both subsidiaries of London-based Prudential PLC, one of the world’s largest financial institutions, with more than $250 billion under management.

According to executives from both firms, the indirect affiliation wasn’t a factor in the decision to replace three subaccount money managers with Curian.

“In this kind of heightened regulatory environment, we had to jump through a lot of hoops,” says Curian executive vice president James Vitalie. “The due-diligence process was pretty rigorous, and I think, frankly, the standard was higher for us so that there wouldn’t be a shadow of doubt.”

Greg Salsbury, an executive vice president with Jackson National’s distribution arm, says the decision to go with Curian had more to do with establishing a long-term business relationship between the two companies.

“We believe Curian has established a platform that will result in a number of advantages for us,” he says.

At its core, Mr. Salsbury says, the decision to use Curian’s passively managed index, sector and target portfolios boiled down to Curian’s technologically advanced platform.

“We believe, essentially, that Curian has a better platform for managing passive money,” he says. “The fact that it’s highly automated and paperless introduces cost savings that can be passed along to the investors.”

Good timing

The increased emphasis on passive strategies, which are sometimes referred to as “emotionless money management,” wasn’t driven by the current round of mutual fund scandals, both companies say.

But nobody is denying that the timing is good.

“Clearly, the benefits of passive money management are probably recognized today more than they have ever been,” Mr. Salsbury says.

“The scandals were not part of what drove our decision, but it is possible we will be benefactors to some degree,” he adds. “There is no question investors are taking a closer look at the role of human decision-making.”

In addition to a narrowed margin for human error, Mr. Vitalie expects the marketplace to appreciate the transparency, tax efficiency and overall lower cost of passive management.

“We think there’s a lot of merit in passive strategies,” he says. “Knowing exactly what you own is becoming more desired in the marketplace.”

Of Jackson National’s $60 billion in total assets under management, about $9 billion is invested in variable annuities.

As of Dec. 15, when Curian is scheduled to take over management of the 23 subaccounts, passive investment strategies will represent about one-third of the subaccount investment options. However, 87% of the assets will be invested in active strategies.

Harvey Hirsch, an independent industry consultant based in New York, interprets the heavy shift toward passive subaccount strategies as a sign that Jackson National is pulling back from its emphasis on active management.

“Most VA subaccounts are actively managed, and this sounds to me like Jackson National may have said the best thing for its investors is passive over active,” Mr. Hirsch says.

“This is a major strategic decision by Jackson National,” he adds. “They may have simply thrown in the towel in trying to pick active managers.”

Frank O’Connor, director of product development at the Variable Annuity Research and Data Service in Atlanta, says while the breakdown of passive and active investment strategies isn’t closely monitored, the balance remains in favor of active management.

According to VARDS, a unit of Finetre Corp. in Herndon, Va., of the $915 billion in total variable annuity assets, about $650 billion is subadvised by more than 400 subaccount managers.

For Curian, as a company that hasn’t even been in business for a full year, the Jackson National deal is a giant step forward.

“We’re in the planning process now to launch these services,” Mr. Vitalie says. “Once you’re managing money inside annuities, it’s easy to go and do it for another company that sells annuities.”

Burton Greenwald, a Philadelphia-based independent consultant, warns success in the world of VA subaccounts is an uphill battle.

“The two components that are most essential for success in this area are a high-profile brand name and superior long-term performance or outstanding short-term performance,” Mr. Greenwald says. “Curian certainly lacks the former, and it will be a long time before it has the latter.”

Mr. Hirsch, however, doesn’t follow the thinking that name recognition ranks quite that high in the business of VA subaccount management.

“The fact that Curian is relatively unknown doesn’t necessarily mean that they can’t make money as a passive manager,” he says. “But the key to passive management is volume.”