It s time for a different approach to managing volatility.

Transcription

1 Nationwide Funds It s time for a different approach to managing volatility. The NVIT Managed Funds Not a deposit Not FDIC or NCUSIF insured Not guaranteed by the institution Not insured by any federal government agency May lose value FOR advisor USE ONLY NOT FOR DISTRIBUTION with the public

2 In a volatile market, a traditional approach may not be enough. 2 FOR ADVISOR USE ONLY NOT FOR DISTRIBUTION TO THE PUBLIC

3 The downturns in the stock market since 2000 have made many investors less confident in the financial markets. For them, the traditional approaches to risk management don t seem adequate for a market where volatility is the new normal. of investors say they re open to new approaches for reducing volatility and managing risk. Natixis Global Asset Management study of 702 U.S. individual investors, May June 2012 Financial advisors have an opportunity to take a different approach to managing volatility for clients especially those who are near or early in retirement and using variable annuities to build assets and plan for income. A solution for the new normal The NVIT Managed Funds, available in Nationwide Financial variable insurance products and annuity living benefit riders, offer clients a solution for managing the risks of market volatility as they invest for growth and income for retirement. Our patent-pending algorithm evaluates stock market conditions on a daily basis. Based on our evaluation, the funds actively adjust equity exposure to seek gains when volatility is low and avoid excessive losses when volatility is high. THIS PIECE MUST BE PRECEDED OR ACCOMPANIED BY THE FUNDS PROSEPCTUS NPR-MVOL. 1

4 Volatility concerns throughout retirement. Market volatility is an acute concern for investors near retirement, in the early years of retirement, or later in retirement. Short-term investment losses can have a big impact on how long their savings lasts, and may mean the difference between having enough money to last throughout retirement and running out sooner than planned. When volatility matters Before retirement Early in retirement Later in retirement Primary goal: Build assets for future income withdrawals Primary goal: Manage income withdrawals to last throughout retirement Primary goal: Preserve portfolio values for cash-flow needs Primary risk: Portfolio losses just before retirement leave investors with little time to recover. Primary risk: Declines early in retirement could mean running out of money sooner than planned. Primary risk: A drop in investment value later in retirement could leave less money available for emergency needs, financial support for a surviving spouse or transfer to beneficiaries. 2 FOR ADVISOR USE ONLY NOT FOR DISTRIBUTION TO THE PUBLIC

5 Avoiding the catch-up game. For all investors, a strategy to help avoid excessive portfolio losses is a good idea. Because the more they lose during a market downturn, the more they ll need to gain back in percentage terms to recover fully from the loss. For example, losing 20% of portfolio value in a market correction requires a gain of 25% to recover. And as losses magnify, it becomes even harder for investors to get back to where they started. $100,000 $80,000 $60,000 20% loss 25% return 30% loss 43% return 100% return $40,000 50% loss For some clients, playing this catch-up game could mean spending more time recovering from market losses than accumulating assets for retirement. This is a good reason why clients should consider managing their portfolio with an eye toward lessening the impact of market volatility. THIS PIECE MUST BE PRECEDED OR ACCOMPANIED BY THE FUNDS PROSEPCTUS NPR-MVOL. 3

6 Have markets always been volatile? If you look back over several decades of U.S. stock market performance, you may not necessarily see volatility just the trend of steady growth that made the stock market the go-to place for long-term investors. But within that big picture are shorter periods lasting 10 to 20 years when secular trends alternate between rising bull markets (such as 1982 to 1999) and more volatile bear markets (such as 2000 to present). Dow Jones Industrial Average historical performance from Logarithmic scale % Cumulative Return 9 yrs -5.92% Cumulative Return 18 yrs % Cumulative Return 5 yrs 2.95% Cumulative Return 25 yrs % Cumulative Return 11 yrs 1.18% Cumulative Return 17 yrs % Cumulative Return 17 yrs 20.69% Cumulative Return 13 yrs 13,104 10,000 1, /1896 1/1906 2/1906 6/1924 7/1924 9/ / /1954 8/1929 1/1966 2/ / / /1999 1/ /2012 Data source: Federal Reserve Bank of St. Louis. Performance displayed represents past performance, which is no guarantee of future results. The Dow Jones Industrial Average is unmanaged and unavailable for direct investment. Returns do not reflect any dividends, management fees, transaction costs or expenses. It s usually easy to achieve gains in a secular bull market, and traditional asset allocation strategies worked well during these periods to manage investment risk. But in a secular bear market, when performance is choppy over consecutive years, achieving growth is a greater challenge and traditional asset allocation may not be enough to adequately manage risk in client portfolios. 4 FOR ADVISOR USE ONLY NOT FOR DISTRIBUTION TO THE PUBLIC

7 A different approach for volatility. The NVIT Managed Funds invest in a traditional asset allocation portfolio of underlying stock and bond funds, managing investment risk through diversification. An additional layer of risk management for market volatility comes from an overlay of stock index futures, which dynamically adjusts the funds overall equity exposure in response to market volatility. Equity exposure decreases to as low as zero in periods of high volatility and declining equity markets, seeking to lessen portfolio losses. Equity exposure increases or is maintained in periods of low volatility and rising equity markets, seeking opportunities for portfolio gains. high volatility low volatility With the NVIT Managed Funds, you and your clients can invest with a team of portfolio and risk management professionals who bring thorough experience in traditional asset allocation and sophisticated strategies for hedging market risks. Nationwide Funds manages the core portfolio, including selection of the underlying fund subadvisers and monitoring of their performance. BlackRock Asset Management manages the dynamic overlay using stock index futures according to our quantitative process for evaluating volatility. Keep in mind that diversification does not guarantee returns or insulate an investor from potential losses, including the possible loss of principal. THIS PIECE MUST BE PRECEDED OR ACCOMPANIED BY THE FUNDS PROSEPCTUS NPR-MVOL. 5

8 NVIT Managed Funds: How they work The NVIT Managed Funds are designed to manage risk in volatile markets by combining a traditional strategic asset allocation strategy with a dynamic risk management overlay. Core portfolio Traditional asset allocation Each NVIT Managed Fund has a core portfolio that follows a traditional strategically managed asset allocation model of stock and bond funds. Clients can select a core portfolio with a mix of underlying stock and bond investments that matches their objectives and risk tolerance. Clients can choose a core portfolio of actively managed funds in the NVIT Cardinal SM Managed Funds, or passively managed funds in the NVIT Investor Destinations Managed Funds. Dynamic Overlay Volatility management with index futures Each fund includes a dynamic overlay that uses equity derivatives to adjust the equity exposure of the entire fund to manage portfolio volatility. Equity exposure may be as low as 0% when our evaluation indicates a highly volatile and declining stock market. In low-volatility periods and when stock prices are rising, the dynamic component can increase equity exposure beyond the core portfolio allocation seeking to capture market gains. Our patent-pending and proprietary algorithm measures market indicators, including price adjustments and market volatility, on a daily basis. Based upon these indicators, equity exposure is actively increased or decreased through the dynamic overlay to stabilize the portfolio and limit projected portfolio volatility. (Maximum projected volatility is different between the NVIT Managed Growth and NVIT Managed Growth & Income Funds.) This empirical process allows us to avoid subjective decision-making and maintain the integrity of our volatility measurements. 6 FOR ADVISOR USE ONLY NOT FOR DISTRIBUTION TO THE PUBLIC

9 NVIT Managed Funds Core portfolio allocation and dynamic overlay Bonds/Cash Equity NVIT Cardinal Managed Growth Fund 0% NVIT Cardinal Managed Growth & Income Fund 0% 80% 40% 60% 50% 50% 65% equity exposure 0 80% equity exposure 0 65% NVIT Investor Destinations Managed Growth Fund 0% NVIT Investor Destinations Managed Growth & Income Fund 0% 80% 40% 60% 50% 50% 65% equity exposure 0 80% equity exposure 0 65% THIS PIECE MUST BE PRECEDED OR ACCOMPANIED BY THE FUNDS PROSEPCTUS NPR-MVOL. 7

10 A hypothetical example To illustrate how a managed volatility strategy with our quantitative evaluation process may potentially benefit clients, we compared performance of traditional asset allocation models over a 10-year period both with and without a managed volatility strategy. We used index performance for the years 2003 through 2012 to represent returns for the equity and bond holdings. The charts on these pages show the results of these comparisons, starting below with a 60% equity/40% bond portfolio. Growth of $100,000 invested in a 60/40 equity/bond portfolio, $225,000 60/40 model performance with volatility overlay (left axis) 60/40 model performance with traditional asset allocation (left axis) $209, % $200,000 Equity exposure of volatility overlay model (right axis) $193,099 90% 80% $175,000 $150,000 $125,000 Core portfolio equity exposure 70% 60% 50% 40% 30% Total Equity Exposure $100,000 20% 10% 0% PERFORMANCE SHOWN REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. PERFORMANCE IS NOT REPRESENTATIVE OF ANY NATIONWIDE PRODUCT. Equity performance represented by the S&P 500 Index. Bond performance represented by the Barclays U.S. Aggregate Bond Index. See Page 13 for index definitions. Investors cannot invest directly in an index. Indexes are also not managed and do not include fees. If fees were included, returns would be lower. The shaded areas in these charts show how equity exposure in the overall portfolio would have adjusted in response to market volatility. When conditions were favorable early in this period, equity exposure was increased over the 60% core portfolio threshold often up to the 80% maximum. But as markets declined in 2007 and 2008, total equity exposure was decreased significantly. 8 FOR ADVISOR USE ONLY NOT FOR DISTRIBUTION TO THE PUBLIC

11 This chart shows the results of the same performance comparison as the previous page, only using a managed volatility strategy with a 50% equity/50% bond asset allocation model. (Be sure to review Page 13 at the end of this brochure to learn how performance and equity exposure for these illustrations was calculated.) Growth of $100,000 invested in a 50/50 equity/bond portfolio, $225,000 50/50 model performance with volatility overlay (left axis) 100% $200,000 50/50 model performance with traditional asset allocation (left axis) Equity exposure of volatility overlay model (right axis) $196,242 $189,925 90% 80% $175,000 $150,000 $125,000 Core portfolio equity exposure 70% 60% 50% 40% 30% Total Equity Exposure $100,000 20% 10% 0% PERFORMANCE SHOWN REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE FUTURE RESULTS. PERFORMANCE IS NOT REPRESENTATIVE OF ANY NATIONWIDE PRODUCT. Equity performance represented by the S&P 500 Index. Bond performance represented by the Barclays U.S. Aggregate Bond Index. See Page 13 for index definitions. Investors cannot invest directly in an index. Indexes are also not managed and do not include fees. If fees were included, returns would be lower. In both comparisons, this managed volatility strategy would have helped clients during this period by participating in equity market gains and avoiding significant losses when volatility increased. THIS PIECE MUST BE PRECEDED OR ACCOMPANIED BY THE FUNDS PROSEPCTUS NPR-MVOL. 9

12 A company that understands risk management You and your clients want to have confidence in the company that s backing their variable annuity guarantees and managing their exposure to market volatility. So why can you and your clients trust Nationwide Financial for risk management? Professionals with strong quantitative backgrounds We ve assembled a unique team of actuaries, mathematicians and economists who bring strong quantitative backgrounds and understanding of both insurance and financial risk. Having these capabilities in-house allows us to finely tune our hedging strategies and respond nimbly to changing market conditions. Specialists in asset allocation portfolios Our team of portfolio managers and investment analysts are experienced in building asset allocation portfolios to suit different risk profiles and in evaluating subadvisers for the underlying funds who offer the potential for returns. The strength and stability of Nationwide At Nationwide, we have long embodied a strong risk management culture throughout our entire organization. This commitment is reflected in our strong enterprise risk management rating by third-party rating agency Standard & Poor s. Our risk management capabilities help us help you manage through periods of market volatility and uncertainty. 10 FOR ADVISOR USE ONLY NOT FOR DISTRIBUTION TO THE PUBLIC

13 Financial strength ratings A+ Superior A1 Good A+ Strong A.M. Best 2nd strongest of 16 Received 10/17/02 Affirmed 3/27/12 Moody's 5th strongest of 21 Received 3/10/09 Affirmed 5/15/12 Standard & Poor's 5th strongest of 22 Received 12/22/08 Affirmed 8/31/12 These ratings and rankings reflect rating agency assessment of the financial strength and claims-paying ability of Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance Company. They are not intended to reflect the investment experience or financial strength of any variable account, which is subject to market risk. Because the dates are only updated when a change occurs in the rating, the dates above reflect the most recent ratings we have received. They are subject to change at any time. THIS PIECE MUST BE PRECEDED OR ACCOMPANIED BY THE FUNDS PROSEPCTUS NPR-MVOL. 11

14 A strategy for the new normal Dramatic swings in the stock market can change the way clients view opportunities in the financial markets. For clients concerned about the impact market losses and uncertainty can have on their portfolios, the NVIT Managed Funds offer a different approach for managing the heightened risks they face. FOR CLIENTS, the NVIT Managed Funds may help Preserve portfolio values for income withdrawals Participate in growth opportunities in equity markets Maintain liquidity of account values for transfers and emergency needs And by working with Nationwide Financial, you get the confidence and support you need to help your clients manage risk and prepare for their financial future. FOR YOU, the NVIT Managed Funds may help Keep clients on track during uncertain and volatile periods Build stronger and more valuable client relationships Stabilize assets under management during market downturns For more information about the NVIT Managed Funds, contact the National Sales Desk at FOR ADVISOR USE ONLY NOT FOR DISTRIBUTION TO THE PUBLIC

15 About the performance illustrations on Pages 8 9 These charts depict how strategies similar to those used by the NVIT Managed Growth Funds and the NVIT Managed Growth & Income Funds would have performed in comparison to the performance of traditional asset allocation portfolios that do not adjust equity exposure in response to volatility. These illustrations assume hypothetical investments of $100,000 on Jan. 1, 2003 in blended equity/bond portfolios both with and without a managed volatility strategy, continuing until Dec. 31, Our blended indexes were created using 60% or 50% of the S&P 500 and 40% or 50% of the Barclay s US Aggregate Bond Index. The returns were aggregated on a daily basis using daily index returns and the portfolio was rebalanced on a quarterly basis using calendar quarters (Mar, June, Sept, Dec). The charts also depict how our quantitative process to evaluate market volatility would have adjusted the equity exposure for both strategies during this period. Nationwide s proprietary algorithm was implemented as an overlay to this index and effectively adjusted the equity (S&P 500) market exposure. On a daily basis, the algorithm uses the S&P 500 daily price fluctuations to determine the markets historical and implied volatility. Based on the calculated market volatility, the algorithm creates a synthetic equity exposure and applies it to the blended indexes. The performance tests were created with knowledge of how the stock market performed between 2003 and In applying our quantitative process to manage the funds actual equity exposure going forward, we will not have the advantage of this knowledge, nor be able to predict or anticipate the future direction of the stock market. How performance was calculated Actual fund performance was not used in these illustrations. Instead, we used index performance for the period from 2003 through 2012 to represent performance of the equity and bond holdings for these strategies, as listed below: Asset Class Index Annualized return for the period Equities S&P 500 Index 7.10% Intermediate-term bonds Barclays U.S. Aggregate Bond Index 5.18% Because we used index performance to represent performance of the equity and bond holdings for these strategies, results shown in the charts on Pages 8 and 9 are not indicative of actual performance clients achieve through investment in the NVIT Managed Funds. There is no guarantee that our strategies or our quantitative evaluation process will help clients avoid portfolio losses with actual investment in the funds. Keep in mind that index performance represents past performance for the period indicated and does not guarantee future results. Indexes are not managed and clients cannot invest directly in an index. Index definitions The S&P 500 Index is an unmanaged, market capitalization-weighted index of 500 stocks of leading large-cap U.S. companies in leading industries and gives a broad look at the U.S. equities market and those companies stock price performance. The Barclays U.S. Aggregate Bond Index is an unmanaged, market value-weighted index of investment-grade, fixed-rate debt issues (including government, corporate, asset-backed, and mortgage-backed securities with maturities of one year or more) that is generally representative of the bond market as a whole. THIS PIECE MUST BE PRECEDED OR ACCOMPANIED BY THE FUNDS PROSEPCTUS NPR-MVOL. 13

16 Variable products are sold by prospectus. Both product and underlying fund prospectuses can be obtained by writing to Nationwide Life Insurance Company, P.O. Box , Columbus, OH Before investing, please read the prospectus carefully and consider investment objectives, risks, charges and expenses. The product and underlying fund prospectuses contain this and other important information. When evaluating the purchase of a variable annuity, your clients should be aware that variable annuities are long-term investment vehicles designed for retirement purposes and will fluctuate in value; annuities have limitations; and investing involves market risk, including possible loss of principal. The use of diversification and asset allocation as part of an overall investment strategy does not assure a profit or protect against loss in a declining market. As with any fund, the value of the funds investments and therefore, the value of fund shares may fluctuate. These changes may occur because of: Stock market risk The fund could lose value if individual stocks in which underlying funds invest go down. Smaller company risk Smaller companies are usually less stable in price and less liquid, and so are more vulnerable than larger companies to adverse business and economic developments. Liquidity risk When there is no or active trading market for specific securities, it s more difficult to sell securities at or near perceived values, and so the value may go down. Fund-of-funds risk There are certain risks associated with a structure whereby the Fund invests primarily in other mutual funds. Fixed-income securities risk Investments in fixed-income securities, such as bonds or other investments with debt-like characteristics, subject the Fund to interest rate risk, credit risk and prepayment and call risk. All guarantees are subject to the claims-paying ability of Nationwide Life Insurance Company. These investment options are only available in variable annuity products issued by life insurance companies. They are not publicly traded mutual funds nor offered or made available directly to the general public. The Nationwide Variable Insurance Trust (NVIT) Managed Funds are designed to offer traditional long-term asset allocation blended with a strategy that seeks to mitigate risk and manage portfolio volatility. These funds may not be successful in reducing volatility, and it is possible that the funds volatility management strategies could result in losses greater than if the funds did not use such strategies. Asset allocation is the process of spreading assets across several different investment styles and asset classes. The purpose is to potentially reduce long-term risk and capture potential profits across various asset classes. The NVIT Managed Funds are distributed by Nationwide Fund Distributors LLC (NFD), member FINRA, King of Prussia, Pa. NFD is not an affiliate of any subadviser mentioned in this brochure. Variable annuity and variable life insurance products are issued by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, Columbus, Ohio. Nationwide Life Insurance Company is a subsidiary of Nationwide Financial Services, Inc. The general distributor is Nationwide Investment Services Corporation (NISC), member FINRA, One Nationwide Plaza, Columbus, OH In MI only: Nationwide Investment Svcs. Corporation. NISC is not affiliated with any subadviser listed in this brochure, except Nationwide Asset Management, LLC. Nationwide, Nationwide Financial, the Nationwide framemark, Nationwide Funds and NVIT Cardinal are service marks of Nationwide Mutual Insurance Company Nationwide Funds Group. All rights reserved. FOR ADVISOR USE ONLY NOT FOR DISTRIBUTION TO THE PUBLIC THIS PIECE MUST BE PRECEDED OR ACCOMPANIED BY THE FUNDS PROSEPCTUS NPR-MVOL. MFM-0984AO (04/13)