BMO launches first segregated funds with ETFs

By Alain Thériault | November 18 2013 06:45PM

BMO Life is launching its first segregated fund product, and is betting on the popularity of its parent company’s exchange traded funds (ETFs). The insurer is distinguishing itself in the market by offering to automatically reset the maturity guarantee amount every month.Traded by securities-licensed investment advisors since iShares first appeared in 2000, ETFs broke into the Canadian mutual fund industry in 2009 (with Invesco), and into the segregated fund market in 2012 (with Sun Life Financial).

Unlike Sun Life which used a third party, Blackrock, to create two portfolios that were partially composed of ETFs, BMO Life is launching its BMO Guaranteed Investment Funds (BMO GIFs) by incorporating BMO Financial Group’s ETFs. The official launch is scheduled Dec. 2, but BMO has been working on getting the word out since October.

To create these BMO GIFs, the bank’s insurance subsidiary is working jointly with BMO Asset Management, an investment subsidiary with more than $130 billion under management. It is the latter that will put together the portfolios.

The following funds will be available: the Canadian Balanced Growth Fund, the U.S. Balanced Growth Fund, the Canadian Income Strategy Fund, and the North American Income Strategy Fund. The line-up also includes two separate cash funds: the Holding Money Market Fund and the Money Market Fund.

The maturity guarantee will be 100% of deposits made at least 15 years before the maturity date and 75% of deposits made less than 15 years before that date. The policy owner is the one who selects the length of time before the maturity date: the term must be at least 15 years and not more than 25 years. At the selected maturity date, the client has the option of renewing the contract for another 15 to 25 years. The final maturity date: 100 years.

The guarantee at death will be equal to 100% of deposits made by the customer before age 75 and 75% on those made afterwards. The insurance fees range between 0.73% to 1.25% depending on the risk associated with the underlying ETFs. They are subject to a cap.

As for compensation, the advisor has the option of negotiating with the client for an initial sales charge (between 0 and 5.0%). Otherwise, the advisor can offer a deferred sales charge (5.5% in year 1, declining to 2.0% in year 7). Finally, the advisor also has a no-load option with a uniform prorated 24 month commission chargeback. Paid monthly, the trailing commission is 1.00% (0.50% for the deferred option), except on money market funds.

As a result of their association with BMO ETFs, the segregated funds also inherit BMO’s “volatility control” feature, where BMO manages risk by reallocating the mix of equities and fixed income investments. This control aims for a target level of volatility and rebalances the portfolio daily. The ETF with this control feature has asset protection in the form of a government bond. The investment mix is determined by volatility, current market values, interest rates, and overall asset protection.

Monthly auto reset

BMO Life resets the maturity guarantee every month. This is done automatically at the end of each month, up to 10 years before the maturity date.

This feature sets BMO’ apart from its competitors in the segregated fund market, where the automatic reset is usually triggered once a year. In other cases, the client resets the guaranteed maturity value himself, twice a year in most of the products that have this kind of option.

In a time of increasing compliance obligations, the insurer suggests there is a strong argument for using this kind of feature. “Client-initiated reset options put the onus on the advisor and the client to track and decide when they want to initiate a reset. We take all the work and worry out of the whole process, and off the shoulders of the advisors,” says Steve Carter, vice-president of marketing at BMO Life, in an interview with The Insurance and Investment Journal.

BMO has waited a long time before getting into seg funds. These hesitations date back to the days of AIG Life of Canada. “There were some false starts. We started looking at this back to AIG era. Then, we were acquired by BMO and started again to think about it, but at that point, OSFI was basically reviewing its capital requirements. We had to put the project on hold,” recalls Carter.

It may have been ETFs and their low management fees that eventually made things possible for BMO. “We just saw a strong opportunity to wrap ETFs in a seg fund because it’s a different value proposition and also a less expensive one than actively managed funds. When providing a rich maturity guarantee — like 100% with automatic monthly resets — any savings in the underlying funds makes the difference,” comments Carter.

He adds that ETFs also make it easier and less costly to manage the risk of the 100% maturity guarantee. “You can match the option you’re buying with the index itself. There’s a lot of efficiency in wrapping BMO ETFs from a cost point of view, which enables us to provide a richer guarantee.”

The fact that there has been a great deal of interest in BMO’s ETFs since their release in 2010 may have also played a part in BMO Life’s decision to launch the seg fund product. Their ETF assets have doubled since last year, reaching nearly $12 billion at the end of the third quarter of 2013. BMO is well ahead of its principal rival Blackrock in terms of new sales. But for its part, Blackrock still has the largest share of the Canadian ETF market with assets under management of just over $40 billion at the end of the 3rd quarter.

BMO has relied on BMO Asset Management’s expertise to build the portfolios. In an interview with The Insurance and Investment Journal, BMO Guardian Funds vice president Leon Garneau Jackson says that the product line-up is coming to market at a good time, given the the current environment. “The U.S. market is definitely bullish and even the Canadian market is starting to attract investors,” he says.

According to Mr. Jackson, the volatility control feature allows investors to take part in the market without worrying about downturns. “You participate less in rising markets and lose less money when they are down. The goal is to preserve capital rather than having one big year and then struggling with high volatility during the next year,” he says.

Mr. Jackson also praises these fund’s conservative nature. “Several insurance companies around the world found themselves in a difficult situation with guarantees tied to the markets and with other products not necessarily related to segregated funds, such as credit default swaps (CDS), which were hit by the perfect storm. The product we are launching is good in both markets: rising and falling.”

Related to the same topic …