Following suit were Sun Life Financial Inc. and Guelph, Ont.-based Co-operators Life Insurance Co., the seg fund families of which had 80.9% and 73.7% of long-term AUM, respectively, held in funds that ranked in the first or second performance quartiles.
These seg fund families are small, with less than $2 billion in long-term AUM as of Dec, 31, 2017, and have limited offerings. That can make both outperformance and underperformance easier. For example, the smaller seg fund families of ivari Canada ULC, Mississauga, Ont.-based Primerica Life Insurance Co. of Canada and Lévis, Que.-based Desjardins Financial Security (DFS) underperformed.
Bigger seg fund families tend to be more in the middle of the road, which makes Manufacturers Life Insurance Co.’s (Manulife) performance impressive. Manulife’s seg fund family had $35.8 billion in long-term AUM as of Dec. 31, 2017, second only to London Life Insurance Co.’s seg fund family, which had almost $37.2 billion in long-term AUM.
Many seg funds are versions of corresponding mutual funds, as is the case for Manulife; the investment performance of both its mutual fund and seg fund families were similar in 2017. Manulife’s seg fund and mutual fund families had 71% and 68.7%, respectively, of long-term AUM held in funds that were in the first or second performance quartiles.
In RBC’s case, there was a much bigger difference, as only 62.9% of its mutual funds were in the first or second performance quartiles. This is not surprising, given the firm’s significant mutual fund offering, which, at $307.2 billion, had the most long-term AUM among all mutual fund families in Canada as of yearend 2017.
Most of the AUM in RBC’s seg fund family is in funds for which the underlying mutual funds benefited from overweighting equities and “superior securities selection,” says Dan Chornous, chief investment officer (CIO) with RBC Global Asset Management Inc.
Sadiq Adatia, CIO of Sun Life Global Investments (Canada) Inc., also credits asset allocation and stock-picking for the seg fund family’s excellent performance in 2017. This performance was a significant turnaround from 2016, when just 39.8% of the seg fund family’s long-term AUM was held in funds in the first or second performance quartiles.
“Our [seg] funds tend to offer high-quality stock selection and can be defensive in asset allocation to preserve capital,” Adatia says. “They therefore tend to do better in down markets.”
That defensiveness was a negative factor in 2016. But Sun Life’s portfolio managers are flexible. When they realized there was no reason to be so defensive in 2017, there was some “tweaking at the margins,” Adatia explains.
Here’s a look at the seg fund families in more detail:
– Royal Bank of Canada’s strong performance can be attributed mostly to: RBC Select Balanced ($257.9 million in AUM as of Dec. 31, 2017); RBC Select Conservative ($225.5 million); RBC Canadian Dividend ($184.1 million); RBC Select Growth ($86.9 million); and RBC Balanced Growth & Income ($64 million).
These five seg funds accounted for 74.5% of the seg fund family’s AUM. (Note that most seg funds have several versions, with slightly different features, as denoted in their names. In this article, the generic name for funds is used.)
– Sun Life Financial Inc.’s portfolio managers not only adjusted their strategy because of the strong markets last year, but the same was done for the firm’s managed solution products, the asset allocation of which is controlled by the company’s investment team, Adatia says.
A potential positive note for Canadian investors could be increases in some oil stocks over the next few years, Adatia adds. The S&P/TSX equal weight oil and gas subindex dropped by 10.6% in 2017 despite the rise in oil prices.
Adatia believes there could be some “catchup” in the energy sector this year, but, he warns, that will probably take time because oil companies don’t invest in additional capacity unless there’s a sustained period in which the price of oil is more than US$60 a barrel.
– Co-operators Life Insurance Co.’s seg funds did well despite both their internal and outside portfolio managers employing a “value” investment style, which generally didn’t do as well last year as seg funds managed using a “growth” style did.
Co-operators’ outside portfolio managers include: Calgary-based Mawer Investment Management Ltd., which managed mutual funds that performed well in 2017; as well as Fidelity Investments Canada ULC and Franklin Templeton Investments Corp., both of which managed mutual funds that produced relatively weak performance. But the Co-operators’ family’s largest seg funds are managed by the firm’s internal portfolio managers or Mawer.
– Manufacturers Life Insurance Co.’s seg fund family’s performance was enhanced by several of its largest seg funds, says Brent Wilson, director of investment research and analysis, investment management services.
These funds include: Manulife Monthly High Income Fund ($5.1 billion in AUM as of Dec. 31, 2017); Manulife U.S. Monthly High Income ($1 billion); Manulife Simplicity Balanced Portfolio Fund ($937.2 million); Manulife Simplicity Growth ($912.2 million); Manulife Diversified Investment Fund ($869.1 million); Manulife TD Dividend Income ($778 million); and Manulife CI Signature Income & Growth Fund ($619.9 million).
These seven seg funds, all of which had above-average performance, accounted for almost 30% of Manulife’s seg fund family’s total long-term AUM.
Manulife Monthly High Income’s strong performance, for example, was “primarily because of strong stock selection, high-quality fixed-income positions and asset-allocation decisions,” Wilson says. That fund also benefited from a “long-maintained underweighted allocation to the energy sector.” The fund’s foreign content – 25% of AUM was held in U.S. stocks as of Dec. 31, 2017 – led to increased returns because of U.S. equities’ much stronger performance vs Canadian equities.
– Industrial Alliance Insurance and Financial Services Inc.’s (IA) seg fund family had 60.2% of its long-term AUM held in funds ranked in the first or second performance quartiles in 2017.
Pierre Payeur, director of fund management with Quebec City-based IA, considers 2017 a lesson for Canadian investors regarding the need for diversity in portfolios. For example, technology stocks did extremely well; but the technology sector is very small in Canada, so portfolio managers had to go outside the country to get good exposure.
Payeur believes 2018 could be interesting and notes that we’ve already seen more volatility in equities, which may favour value investing. Rising interest rates also may result in more money going into fixed income. Existing bonds will lose value, but new ones will benefit from higher coupon rates.
Payeur also cites the benefits of options and currency hedging. With stock multiples high, some IA portfolio managers are buying options to protect against sharp drops in equities. Currency hedging also can help, as it did in 2017, when the rise in the Canadian dollar (C$) vs the U.S. dollar reduced returns when U.S. investments were translated into C$.
– Empire Life Insurance Co.’s seg fund family had 58.3% of long-term AUM in funds in the first or second performance quartiles. The Kingston, Ont.-based firm has only one investment style: a value-based approach in which portfolio managers buy high-quality companies whose stocks are out of favour. The likely higher volatility this year should “provide more opportunities for us,” says Ian Hardacre, Empire Life’s senior vice president and CIO.
– Canada Life Assurance Co., Great-West Life Assurance Co. (GWL) & London Life Insurance Co. are owned by Winnipeg-based Great-West Lifeco Inc. and use the same investment-management services.
Nevertheless, the three firms can have different seg fund performances, as was the case in 2017. GWL was on top, with 57.9% of long-term AUM in the top two quartiles. Canada Life came in at 47.5% and London Life at 42.3%.
Sam Sivarajan, senior vice president, wealth, in the individual customer unit that oversees investments for all three firms, says the differences are “impacted largely by the balanced, managed solution and asset-allocation funds in each family.”
Another important factor is the number of asset classes used in funds ranked in the same category, which can differ widely. Sivarajan points to what he refers to as Morningstar Canada’s conservative and moderate-risk balanced-fund category, in which funds can have equities holdings as low as 5% and as high as 40%. In a bull market such as the one experienced in 2017, the more equities a fund has, the higher its portfolio return is likely to be.
The distribution of AUM among funds can play a role. For example, Canada Life’s overall performance was helped by Canada Life Enhanced Dividend Fund’s first-quartile performance. The fund had $1.3 billion in AUM, or 15.8% of the seg fund family’s total long-term AUM.
GWL had six seg funds with $420 million-$850 million in AUM – and 61.5% of this AUM was in funds with above-average performance.
London Life has five seg funds with AUM of $2 billion-$3 billion; most versions of these funds were in the third or fourth performance quartiles in 2017.
– Desjardins Financial Security’s seg fund family’s performance was hurt by some of the large seg funds in its lineup.
DFS Canadian Balanced Fidelity had $825.8 million in AUM as of yearend 2017, while four DFS Franklin Quotential portfolios – Balanced Growth, Balanced Income, Dividend Income and Growth – had a combined total of $999.3 million in AUM. These seg funds accounted for almost 45% of DFS’s total long-term AUM – and most versions had below-average performance in 2017.
– Primerica Life Insurance Co. of Canada takes a conservative approach to ensure there is sufficient capital when seg funds reach maturity, says Jeff Dumanski, the company’s president and chief marketing officer.
This results in more fixed-income being held in Primerica’s seg funds than in those seg funds with which Morningstar compares Primerica’s products – and fixed-income returns have been low in the current low interest rate environment.