Segregated fund sales still surging despite redemptions

By Alain Thériault | May 23 2017 07:00AM

Benjamin Reed-Hurwitz

Strategic Insight reports that seg funds are maintaining an upswing that started at least a decade ago, despite major withdrawals by an aging population.

In an exclusive interview with The Insurance and Investment Journal, Senior Analyst responsible for life, health, wealth insurance product and group retirement research at Strategic Insight, Benjamin Reed-Hurwitz, confirms that segregated funds were off to a flying start in 2017, thanks to an exceptional RRSP season.

“This year’s RRSP season was fairly strong compared to 2016. The mutual fund market also had an even bigger jump than seg funds in terms of gross sales, which is possibly why it was interpreted that seg funds had a weak season in Q1 in 2017 against 2016,” Reed-Hurwitz explains.

However, withdrawals ate into net sales, the analyst adds. Net sales are the difference between gross sales and redemptions that occur during the period observed. Reed-Hurwitz explains that gross sales augur future sales potential (of a manufacturer), together with its capacity to continue to grow assets and meet market demand. In contrast, net sales indicate the impact of redemptions (fund withdrawals) on gross sales, “Redemptions, however, are quite high, and are acting as a drag on net flows into segregated funds,” he adds.

He attributes this trend partly to an older clientele withdrawing its money from guaranteed minimum withdrawal benefits (GMWBs), for retirement, or due to an estate event, namely death.

Yet these negative factors are mitigated by seg funds’ allure among the same clientele, owing to the financial security they offer. “Segregated funds have an appeal to this older clientele, because their guarantees offer a protection against high volatility in the market,” Reed-Hurwitz explains.

This population, targeted heavily by seg funds, should jumpstart segregated fund sales. “It’s been an important feature in 2016, when we think to events like the Brexit and the US elections,” he observes.

A decade of growth

Gross sales of seg funds dipped slightly between 2016 and 2015, Strategic Insight data confirm. They reached $12.41 billion in 2016, versus $12.95 in 2015, equal to a drop of 4.2%.

“The small drop in gross sales between 2015 and 2016 is nothing out of ordinary,” says Reed-Hurwitz, because the level of gross sales of 2016 is similar to that of the last 10 years. “Our study that looks back on gross sales of the last 10 years also reveals that the gross sales kept in the $12 billion to $13 billion range since 2007, in a fairly consistent way.”

2013 was an exception, he adds. During that year the downward adjustment of withdrawal guarantees, the closure of products to new deposits and restrictions on existing deposits fuelled a sharper decline in gross sales.

After 2013, segregated fund product and new product launches revitalized sales, Reed-Hurwitz explains. “There’s been a lot of product developments. New GMWBs appeared and products with investment, income and estate classes, bringing a lot of flexibility.”

With these developments and the adjustment of traditional segregated fund guarantees, Reed-Hurwitz notes that seg funds continue to attract a broader audience. Suppliers have responded to a wider array of needs by reshaping their products around guarantees of 75% at death and at maturity, 100% at death and 75% at maturity, and 100% at death and at maturity.

“In addition, many companies made sure they had a complete line-up on their shelves both for advisors and for consumers’ needs. I won’t say that every player did it, but it’s been a focus for them to make sure there’s no gap in their product line.”

2017 trends

Segregated fund assets will probably rise this year. However, Reed-Hurwitz declined to make predictions about the coming quarters of 2017. Total seg fund assets rose to $115 billion in 2016, 5% higher than in 2015.

For now, the lion’s share of segregated funds inflows in terms of gross sales went to balanced funds. Equities seg funds trailed far behind in second place. Investors are covering all the bases. “New money coming in seg funds is more diversified than ever,” Reed-Hurwitz points out. He adds that American markets, Europe, Australasia and the Far East are attracting the bulk of the flows, including not only equity but also the foreign bonds market.

Related to the same topic …