Segregated fund investors seek balance in rocky market

There was a distinct difference between how mutual fund and segregated fund investors behaved during this year’s RRSP season. On the mutual fund side, money market funds were most popular, while on the segregated fund side, balanced funds won out, explains Geraldo Ferreira, vice-president, investments of Aegon Fund Management and Transamerica Life Canada.

For his company, balanced funds during this RRSP season accounted for 79% of inflows for the first three months of 2008 – a record. "I’ve never seen it go that high," he comments. This compares with 68% for the same period in 2007. "There really was a bias toward balanced funds and the biggest driver was volatility." The balanced category includes both the company’s stand-alone seg funds and its balanced portfolio offerings.

He adds that for seg funds there always is a bias in favour of balanced funds because seg investors are generally more conservative by nature, or older and looking at estate planning. This year, though, that bias was accentuated.

In times of volatility, taking a balanced approach is the "prudent way" to stay in the market. "People still want to sleep at night. They want steady growth, rather than erratic."

Industry figures confirm Mr. Ferreira’s observations. Iassen Tonkovski, senior analyst with Investor Economics explains that whereas investors largely favoured short-term funds on the mutual fund side, "on the segregated funds side, short-term funds saw first-quarter net flows of $334 million, while long-term funds brought in $1.3 billion."

He adds that one year ago net flows were $-36 million and $1.8 billion respectively. "The insurance features of segregated funds – maturity and death benefit guarantees, resets – is mostly the reason behind the different experience of the segment."

Balanced funds have historically reeled in the bulk of seg fund sales due to two factors, reporting and capital requirements, explains Mr. Tonkovski.

With respect to reporting, "segregated fund wraps are reported as balanced funds and since most sales in the seg funds segment are captured by these products rather than stand-alone seg funds, the balanced category shows up as the best selling asset class."

Meanwhile on the mutual fund side, "the assets and sales of the portfolios are distributed to their underlying funds located in categories different than balanced funds," Mr. Tonkovski explains.

He adds that capital requirements imposed on seg funds in the early years of the decade changed the economics of the product. Balanced funds, which are less risky than the core equity fund, are a product with lower capital requirements and therefore less costly for insurers and investors.

Related to this is the trend toward portfolio products in the segregated funds segment, he continues. "Packaged solutions are designed with risk management in mind and with rebalancing and complex asset allocation, are smoothing out returns over time and lower the standard deviation of a client’s portfolio. Capital requirements are much less for these products than the regular equity fund."