Standardized returns assume reinvestment of dividends and capital gains. They are adjusted to reflect expenses, including M&E risk charges, administration fees, fund-level expenses such as management fees and operating fees, and contract-level charges such as surrender, contract, and sales charges.
How are Standardized Returns different from Total Returns?
Standardized returns are provided as of month- and quarter-end, whereas NASD non-standardized returns are provided as of month-end only. Also, standardized returns can only be shown for the 1-yr, 5-yr, 10-yr, and Since-Inception periods, whereas NASD non-standardized returns can be shown for additional time periods.
Origin
Morningstar calculates Standardized Returns in-house in accordance with the rules outlined in SEC Rule 482, Forms N-3 and N-4 and reflect the investment experience from the inception date of the subaccount within the separate account. When Standardized Returns are listed since the inception date, Morningstar calculates Standardized Returns from the inception date of the separate subaccount rather than from the inception date of the underlying fund.
For the Pros
In calculating standardized returns, front loads are deducted from an assumed initial investment of $1,000. Contract charges are deducted in full at the beginning of each contract year, meaning that the first year's charge is taken out of the initial investment. Surrender charges are deducted at the end of the investment period and vary depending on the time elapsed since the investment start date in accordance with the actual schedule outlined in the variable annuity's prospectus. Additionally, the surrender charge is applied either on the initial investment or the final market value of the variable annuity as outlined in the prospectus.
The ending net-of-fees value of the VA is used to calculate its annualized total returns according to the following formula:
P(1 + T/100)^n = ERV
Where:
P = A hypothetical payment of $1,000
T = Average annual total return
n = Number of years
ERV = Ending redeemable value
Let’s try an example. Calculate the standardized returns for the following variable annuity subaccount investment, assuming the following:
Ending AUV = 20
Beginning AUV = 12
Annual contract charge = $30
Surrender charge = 7% of initial investment
N = 1; P = $1000
Step 1
Find the value of the initial investment after deducting the contract charge.
$1000 - $30 = $970
Step 2
Find the number of shares owned after deducting the contract charge.
$970 / 12 = 80.83 shares
Step 3
Find the value of the investment after one year.
80.83 ´ 20 = 1616.67
Step 4
Find the value of the investment after one year after deducting the surrender fee.
1616.67 (1 - 7 / 100)
Step 5
Solve for T to find the average annual return.
T = 56.82%