CYA

NM

AG

ENTA

YEL

LOW

BLA

CK

Com

posi

te

Com

positeC

M Y

K

June 27, 2016 B A R R O N ’ S 17

SPECIAL BREXIT REPORT: American companies generate about 70% of revenues at home. That could partially insulate them from Europe’s woes. U.S. banks, airline shares look invitingly cheap.

Brexit Selloff Highlights Strength of U.S. Stocksby Andrew Bary

THE 3%-PLUS DROP FRIDAY IN MAJOR U.S. STOCK

indexes in response to the surprise Britishvote to exit the European Union doesn’t meanthe end of the long bull market dating back to2009.

U.S. stocks remain more insulated fromglobal developments than any other major eq-uity market, as American companies generate70% of revenues domestically. That compareswith 58% for Japanese companies, and 49% forEurope, based on a recent Morgan Stanley re-port. U.S. corporate balance sheets are strong,interest rates are low, and the U.S. economy ison pace for a 2.5% expansion in the currentquarter.

“It’s not like the U.K. is going to remove it-self from the world economy and not tradewith anyone,” says Jim Paulsen, chief invest-ment strategist at Wells Capital Management.“Once the emotion of this event fades, inves-tors may get back to the fundamentals, which,at least in the U.S., are looking better.”

Stocks are appealing relative to bonds,particularly the Treasury market, where the10-year note finished Friday with a 1.56%yield, near the low for the year. More than60% of stocks in the Standard & Poor’s 500 in-dex carry a dividend yield higher than the 10-year note, according to Bespoke InvestmentGroup.

Even more enticing values could lie in Eu-rope. The Euro Stoxx 50 index fetches just 13 times esti-mated 2016 earnings, against a price/earnings ratio of 17for the S&P 500. Dividend yields average 4%, about dou-ble the yield on the S&P 500. European stocks look par-ticularly appealing relative to government bonds, with theGerman 10-year bond carrying a slightly negative yieldand the British 10-year bond yielding just over 1%. TheItalian stock market, hurt by the performance of bigbanks, is down 27% this year, putting it back at 2013 lev-els.

The Dow Jones industrials fell 610 points, or 3.4%, Fri-day, to 17,400, while the S&P 500 index was off 76 points,or 3.6%, to 2,037. While steep, those losses were mild rel-ative to losses overseas. The Stoxx Europe 600 fell 7% inits largest one-day decline since the 2008 financial crisis.

For U.S. holders, the losses in European stocks weremagnified by the dollar’s strength. The Vanguard FTSEEurope exchange-traded fund (ticker: VGK) dropped 11%Friday to $44.48, while the iShares MSCI United King-dom ETF (EWU) declined 12% to $14.57, as the Britishpound fell 9%. The pound closed the session at $1.37 afterhitting its lowest level in three decades.

Year to date, both the Dow and S&P 500 have barely

budged, with the Dow down 0.14% and the S&P down0.3%. U.S. indexes continue to outperform overseas mar-kets; the Euro Stoxx 50 is down 15% in local currency,and Japan’s Topix is off 22%.

Citing U.K. betting markets, which put the odds of aRemain victory at 60%, Barron’swrote in the June 20 issue that theodds of a Remain vote were betterthan investors feared. We wereupbeat about European stocks, ar-guing that a selloff had left valua-tions at levels discounting a Br-exit, or British exit.

We, and the betting markets,got the vote wrong, although Eu-ropean markets haven’t fallen dra-matically since. We favored gold,which rose $58.80 an ounce Fridayon Brexit turmoil, to $1,320, thehighest level in almost two years.

The bear case for global markets is that the Britishvote could lead to a disintegration of the EU, and signalsa reversal of the decades-long trend of globalism and free

trade. “Brexit’s approval marks the likely endof European cohesion and is symptomatic of arejection of the status quo and the globalelite’s consensus,” wrote Doug Kass of Sea-breeze Partners on Friday. “Economic popu-lism is gaining ground in Britain, America, andelsewhere.”

The Brexit situation will linger, as the pro-cess of exiting the EU could take two years.That could result in a “prolonged period of po-litical and economic uncertainty” in the U.K.and Europe, Morgan Stanley analysts wroteFriday.

Helped by rock-bottom rates, traditionallydefensive U.S. stocks have shined this year,highlighted by a 16% gain in electric utilities.The sector was the only gainer Friday, andmany major companies, including Duke En-ergy (DUK) and Consolidated Edison (ED),now trade for about 20 times projected 2016earnings. That’s a full valuation for an industrywith mid-single-digit annual earnings gainsand no growth in power demand.

Consumer stocks also look fully valued,with General Mills (GIS), Kellogg (K), andCoca-Cola (KO) likewise trading for 20 timesprojected 2016 earnings. Real estate invest-ment trusts have been strong performers, too,with the Vanguard REIT ETF (VNQ) return-ing 8.6% this year, including dividends.

Value may lie in hard-hit financial stocks and airlines.Industry leader JPMorgan Chase (JPM), at $60, tradesfor 11 times 2016 estimated earnings and 1.2 times tangi-ble book, and yields more than 3%. JPMorgan and itsbrethren are expected to get the go-ahead from federalregulators to lift their dividends soon. Wells Fargo(WFC), at $46, yields 3.3% and trades for 11 times esti-mated 2016 earnings. Wells, a longtime favorite of Berk-shire Hathaway (BRKA), is almost entirely focused onthe U.S., alone among its big banking peers. Financialturmoil probably doesn’t help big banks’ trading opera-tions, but relatively capital-rich American banks couldbenefit at the expense of European peers.

Airline and travel stocks got crunched Friday, withbig airline stocks down 9%, on average, continuing a ter-rible year for the group. Airlines carry rock-bottom P/Eratios, with American Airlines (AAL), at $27, trading forabout five times estimated 2016 earnings. Delta AirLines (DAL), at $35, has a similar P/E. A strong dollarcould lead to a flood of American travelers in Europe.

It might take U.S. stocks some time to settle down af-ter Brexit, but the underpinnings of the U.S. market stilllook solid.

Friday Friday Weekly YTD Market Dividend DomesticCountry Close Change Change Change P/E 2016 Yield Exposure

U.S. (S&P 500) 2037.30 -3.6% -1.6% -0.3% 17.3 2.2% 70.0%Euro Stoxx 50 2776.09 -8.6 -2.6 -15.0 12.9 4.4 49.0U.K. (FTSE) 6138.69 -3.2 2.0 -1.7 16.7 4.5 35.5Germany (DAX) 9557.16 -6.8 -0.8 -11.0 12.1 3.2 27.6Japan (TOPIX) 1204.48 -7.3 -3.7 -22.2 12.2 2.4 58.0

Sources: Bloomberg; Morgan Stanley

Russ

ell B

oyce

/Reu

ters

Needed: Stiff Upper LipFriday’s washout in global markets cost investors dearly, but also created bargains.

MORE on BREXIT:• Dividend Plays in Europe, p. 33• Our view on U.K. trade, p. 35• Sizing up British stocks, p. M6• Vote puts Fed on hold, p. M9• Hedge fund’s Europe picks, p. S5

20 B A R R O N ’ S June 27, 20161 B A R RON ’ S Date

IMMEDIATE-INCOME ANNUITIESThese contracts turn a lump sum into a lifelong guaranteed income that begins right away. Figures assume a $200,000 investment by a 60-year-old male.

Monthly Income Percentage Paid Total IncomeIMMEDIATE “LIFE ONLY” ANNUITIES Company Rating for Life on Investment by Age 85

American National A $966.03 5.80% $289,809

Guardian A++ 964.20 5.79 289,260

Integrity A+ 959.48 5.76 287,844

Penn Mutual A+ 958.76 5.75 287,628

MetLife A+ 954.37 5.73 286,311

Monthly Income Percentage Paid Total IncomeIMMEDIATE “10 YEAR CERTAIN” ANNUITIES Company Rating for Life on Investment by Age 85

American National A $959.60 5.76% $287,880

Integrity A+ 955.25 5.73 286,575

Guardian A++ 949.36 5.70 284,808

Penn Mutual A+ 945.64 5.67 283,692

MetLife A+ 938.60 5.63 281,580

IMMEDIATE “CASH INSTALLMENT REFUND” Monthly Income Percentage Paid Total IncomeANNUITIES Company Rating for Life on Investment by Age 85

American National A $924.43 5.55% $277,329

Penn Mutual A+ 918.31 5.51 275,493

Integrity A+ 917.97 5.51 275,391

Pacific A+ 906.24 5.44 271,872

Guardian A++ 895.91 5.38 268,773

Pays income for life; if investor dies beforeprincipal is paid out, the insurer keeps theremaining principal.

If investor dies within the first 10 years ofestablishing the contract, heirs get paid untilthe end of the 10-year period.

When an investor dies, any remainingprincipal is paid out to heirs monthly.

DEFERRED-INCOME ANNUITIESThese contracts turn a lump sum into an income stream later.

Annual Income Total IncomePERSONAL PENSIONS Company Rating at Age 65 by Age 85

Foresters A- $19,528.00 $390,560

Mutual of Omaha A+ 19,461.00 389,220

AIG A 19,304.40 386,088

Annual Income Total IncomePERSONAL PENSIONS Company Rating at Age 65 by Age 85

Mutual of Omaha A+ $28,639.80 $572,796.00

Foresters A- 28,203.96 564,079.20

AIG A 27,756.00 555,120.00

Annual Income Total IncomePERSONAL PENSIONS WITHIN IRA Company Rating at Age 84 by Age 90

Foresters A- $31,200.00 $187,200.00

Pacific Life A+ 28,551.72 171,310.32

Principal Financial A+ 28,224.24 169,345.44

Annual Income Total IncomeLONGEVITY INSURANCE Company Rating at Age 80 by Age 90

Foresters A- $61,903.92 $619,039

Mutual of Omaha A+ 59,435.76 594,358

Lincoln National A+ 58,974.72 589,747

Turns a lump sum into an income streamlater. Assumes a 55-year-old male puts in$200,000; income begins at age 65.

Assumes a 45-year-old male puts in$200,000; income begins at age 65.

New rules allow up to $125,000 of IRA assetsto be converted to a deferred income annuityand be exempt from required minimum distri-butions. Payout must begin by age 85.Assumes a 70-year-old puts in $125,000,income begins at age 84; any remainingprincipal upon death is paid to heirs.

Turns a lump sum into an income stream laterin life, after a period of deferment. Assumes a$200,000 investment by a 60-year-old male;income starts at age 80.

person selling the annuity is huge, however.Commissions can be as high as 14%, andincentives such as island getaways, tickets tosporting events, and other gifts are thenorm. “Some agents pick the one that if theysell enough of it, they’re going to go to BoraBora to drink for free,” says Stan Haithcock,an annuity sales agent based in Ponte VedraBeach, Fla., who analyzes annuities for finan-cial-advisory firms. “It’s tragic. This is a goodproduct that’s being sold improperly.”

A new Labor Department rule aims to fixthat. The rule requires anyone selling fixed-indexed and variable annuities in a retire-ment account to assume a fiduciary role—inother words, they need to act in a client’sbest interest. (For more on this, see “NewRule Could Improve Annuities,” page 24.)Right now, “if you want to sell a fixed-in-dexed annuity, you can take a crash course onThursday, pass it on Friday, have a chicken-dinner seminar on Saturday, and make yourfirst sale on Monday,” says Haithcock.

With such hazards in mind, Barron’scompiled a list of 50 of the most competitive,top-rated annuities as of the start of thismonth. We looked for products with highpayouts or rates and reasonable fees, basedon assumptions about age, amount invested,and time periods. It’s important to note thatannuities are extremely fickle products, anda change in assumptions can produce verydifferent results. Insurers also change theirofferings frequently.

Fees aside, the annuities landscape isbeing driven by other factors—such as inter-est rates and longevity projections.

Annuities have two basic functions: toaccumulate assets on a tax-deferred basis (aswith an individual retirement account, youcan’t tap the assets without penalty until age59½), or to turn a lump sum into a guaran-teed lifelong income stream. They can havevariable or fixed rates of return, principalprotections, income guarantees, liquidityoptions, income for long-term care needs, andvarying death benefits, along with other cogsand levers that impact their function and cost.

This year’s list reflects higher interestrates paid by fixed annuities, which investpremiums in bonds and guarantee interestrates for certain periods, much like certifi-cates of deposit. The five- and seven-yearguaranteed rates are slightly ahead of lastyear’s. For example, Midland Nationalrecently offered a 2.9% five-year rate on itsGuarantee Ultimate 5 fixed annuity, com-pared with the best five-year rate a year agoof 2.6%. In contrast, the best rate on a five-year CD is 2%, according to Bankrate.com.

“When the Fed raised rates in December,most banks kept it for themselves, but someinsurance carriers offered more-competitiverates,” says Jamie Cox, managing partner of

America’s 50 Best Annuities: Guaranteed Income for LifeWhether you want the payouts to start immediately or some time in the future, these annuities offer income guaranteed to last as long as you do.

P2B

W179000-0-W

01700-1--------XA

CL,C

N,C

X,D

L,DM

,DX

,EE

,EU

,FL,H

O,K

C,M

W,N

C,N

E,N

Y,P

H,P

N,R

M,S

A,S

C,S

L,SW

,TU

,WB

,WE

BG

,BM

,BP

,CC

,CH

,CK

,CP

,CT

,DN

,DR

,FW

,HL,LA

,LD,LG

,LK,M

I,ML,P

I,PV

,TD

,WO

P2B

W17

9000

-0-W

0170

0-1-

----

---X

A

2 B A R R O N ’ S Date

FIXED-INDEXED ANNUITIES WITH AN INCOME GUARANTEEAssumes a $200,000 investment at age 55, payout at 65.

LEVEL INCOME IN RETIREMENT

10-Year Fixed First-Year Payout Annual Income Total Income Total Income Company Rating Contract Name Interest Rate Bonus Rate Starting at Age 65 by Age 85 by Age 95

Athene A- Ascent 10 Bonus 2.0 10% 15% 5% $21,500 $430,000 $645,000

American General A Power Select Plus 7 5 5 21,000 420,000 630,000

Lincoln Financial A+ Lifetime Income Edge 5 0 6 20,361 407,220 610,835

Global Atlantic Financial A- ForeIncome Option 1 10 0 5 20,000 400,000 600,000

RISING INCOME IN RETIREMENT *

10-Year Fixed First-Year Payout Annual Income Total Income Total Income Company Rating Contract Name Interest Rate Bonus Rate Starting at Age 65 by Age 85 by Age 95

Allianz A+ Allianz 222 N.A. N.A 5% $16,127 $433,388 $767,249*Annual income increases depend on stock market performance; investors participate partially in the market’s upside; this scanario assumes a 2% increase per year.

VARIABLE ANNUITIES WITH INCOME GUARANTEEAssumes a $200,000 investment by a 55-year-old investor, payout at 65. Annual Contract Minimum Contract and and Surrender Guaranteed UpsideCompany Rating Rider Names Rider Fee Charge Annual Income Potential

Jackson A+ Perspective II Lifeguard Freedom 6 Net 2.80% 7 years $16,000 Adds to income 40% of gains up to $10,672

N.A.=not applicable. 1 Includes mortality and expense fees, and any administration fees; fees can vary slightly in certain states. 2 Through 5/31/16. 3 Drops to 0.10% on assets of $1 million or more. 4 Drops to 0.25% when assets reach $500,000; drops to 0.10% after 10 years. Sources: AnnuityAdvantage.com; Cannex; Annuity Rate Watch; ValMark Securities; company information

ANNUITIES FOR TAX-DEFERRED INVESTING 5-Year Annual Return for TopTRADITIONAL VARIABLE Annual Number of U.S. Growth ANNUITIES Company Contract Name Fee1 Inv. Options Fund2

Fidelity Investment Life Insurance Personal Retirement 0.25%3 57 11.35%

Great-West Financial Smart Track Variable Annuity 0.25 101 12.38

Transamerica Premier Life Vanguard Variable Annuity 0.29 17 12.08

TIAA Intelligent Variable Annuity 0.354 66 19.32

Northwestern Mutual Fee Based Select 0.35 40 12.08

Pacific Life Pacific Odyssey 0.40 105 10.67

Nationwide Life Destination Architect 2.0 0.40 123 19.25

Ameritas No-Load Variable Annuity 0.45 65 13.01

Prudential Life Premier Advisor 0.55 78 14.34

Assets grow tax deferred in underlying mutual- fund-like investments. Assumes a $200,000 investment.

Number of 5-Year Annual VARIABLE ANNUITIES Inv. Options Return for TopWITH ALTERNATIVE Annual Traditional vs. U.S. Growth INVESTMENTS Company Contract Name Fee1 Alternative Fund2

Jefferson National Monument Advisor $240 361(288/73) 15.38%

Lincoln National Investor Advantage Fee-based 0.30% 136(124/12) 12.04

Nationwide Life marketFLEX Advisor 0.45 188(148/40) 25.47

Symetra True Variable Annuity 0.60 117(102/15) 19.31

Guardian Life ProStrategies 0.60 33(23/10) 11.44

These contracts come with both traditional and alternative investment choices.

FIXED ANNUITIES Guaranteed GuaranteedWITH GUARANTEED RATE Company Rating Contract Name Period (years) Rate

Midland National A+ Guarantee Ultimate 5 5 years 2.90%

Royal Neighbors of America A- Royal Choice 7 7 years 3.10

Royal Neighbors of America A- Royal Choice 10 10 years 3.25

Assets accumulate at a fixed rate for a specified period, then the rate fluctuates.

America’s 50 Best Annuities: Indexed, Variable, and Tax-Deferred InvestingThese annuities come with a variety of features and complexity that could make them more appealing—but only if the price is right. Fixed-indexed annuities offer

a guaranteed rate, plus additional income when the market is rising. Variable annuities offer tax-deferred investing, and can come with a guarantee.