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Segregated funds: net sales explode in 2007

By Reynaldo Marquez | September 18 2007 05:07PM

Already spectacular for the first seven months of 2007, net sales of segregated funds for the industry are expected to remain strong until year end.

Total net sales for the entire industry reached $2.8 billion at June 30, 2007, handily surpassing the $2.1 billion in net sales generated in the same period last year. According to the most recent Investor Economics data available at press time, the staggering growth of 33.3% corresponds to one of the largest increases in net sales seen since the early 1990s.The strong results are holding steady into the second half of the year. "Since the beginning of July, net sales are higher than those of last year (at the same period), which tells us that they should top the 2006 total by the end of 2007," says

Iassen Tonkovski, analyst at Investor Economics. Total net sales for 2006 for the Canadian industry were $3.4 billion.

Assets under management are also growing. For the industry, they grew by 8.8%, from $68 billion to $74 billion between Dec. 31 and June 30, recent Investor Economics data reveal.

What is driving this growth? Star products are propelling large players’ sales to new heights. Sales at Manulife Investments were up 206% between the first six months of 2006 and the first six months of 2007, Investor Economics reports. According to the financial research firm, net sales at Manulife Investments rose from $203 million to $622 million during the reference period, which ended June 30.

It should be noted, however, that Manulife’s segregated fund sales for all of 2006 were down by almost $500 million compared to 2005. The company accounted for this downturn by stating that the market had been anticipating the launch of its new IncomePlus product (See The Insurance Journal, March 2007).Manulife’s new series of segregated funds

GIF Select, features IncomePlus, a variable annuity product. Mr. Tonkovski confirms that this product is behind Manulife’s seg fund sales growth this year.

Launched in late 2006, this U.S.-inspired product was an overnight success.

In just under 10 months on the market, gross sales of the GIF Select contract that features IncomePlus passed the $2 billion milestone, Manulife reported in a press release published at the end of August.

"We conducted extensive research of the American market before launching our product in Canada," J. Roy Firth, executive vice-president of Manulife Financial told The Insurance Journal.

"Results of our research indicated that soon after its launch that product took one third of the entire American segregated funds market. That led us to believe that we could replicate the same pattern in Canada," he adds.

Mr. Firth thinks the success of the IncomePlus product is just the tip of the iceberg.  "In the years to come, sales for this type of product will explode."

Sales will be driven by the escalating number of investors nearing retirement and worried about outliving their savings.

"We pushed up our sales, but we did not do it at the expense of our competitors. The demand for segregated funds will grow. What we are saying is: the pie itself will grow and it is our intent to have a significant piece of it," Mr. Firth adds.

Over time, Manulife plans to adapt IncomePlus to investors’ evolving needs, Mr. Firth says. The management fees for this product are 3% to 3.5% higher than those of a regular segregated fund, whose fees vary between 25 and 75 basis points. He points out that this also depends on the investors’ perspective. "That minimum withdrawal guarantee offers investors piece of mind. It is an added value for them."

"The minimum withdrawal guarantee is very popular with investors approaching retirement," Mr. Tonkovski confirms.

At retirement, this segregated fund is transformed into an annuity that features guaranteed minimum payments for at least twenty years, he adds.

Not only do investors receive continuous guaranteed income during retirement, but the guaranteed income itself might rise. In fact, payments may exceed the basic guarantee if the fund returns permits.

A Canadian first when it was launched by Manulife, the product has sparked a new trend. For example, CI Investments, in partnership with Sun Life Financial, launched a similar product – Sun Wise Elite Plus – in April.

The fact that many Canadian households are approaching retirement also partly explains investors’ growing appetite for segregated funds, Mr. Tonkovski points out. "These products offer a low risk and high protection. They’re the best kept secret in the Canadian fund industry."

In its analysis of the segregated fund market, Investor Economics divides investors into three categories: prime savers, savers and borrowers. Baby boomers that enter the five-to-ten-year phase before retirement fall into the first category. This means they are particularly interested in this type of tool.

"They are approaching a time when their portfolio is more vulnerable to stock market volatility. So they become prime savers," Mr. Tonkovski explains. "The first wave of baby boomers is now made up of individuals in this category."

To preserve their assets and continue to accumulate capital, individuals in the first category are turning to integrated asset management. This management mode includes wrap accounts, fee based services and discretionary management services…along with segregated funds.

The excellent volatility risk management capacities have also stoked the fervor for segregated funds. Most often, segregated funds are integrated in a program in which assets are allocated periodically and automatically, to maximize the portfolio return, Mr. Tonkovski continues. This approach also minimizes the risk of loss.

Standard Life takes hit

With a 51% plunge in net sales of segregated funds, Standard Life is one of the top 10 sellers in the Canadian industry with the biggest downturn in performance in the first half of 2007, compared with the same period last year. Net sales plummeted from $132 million in the first six months of 2006 to $64 million by June 30, 2007.Several factors explain this plunge, says Denis Berthiaume, senior vice-president, retail markets, at Standard Life. "We saw record sales last year. This was not the case this year. When we compare the two years, this largely explains the setback."

He adds that assets under management at Standard Life are continuing to grow, as Investor Economics confirms. Between December and June, the insurer’s assets under management climbed from $3.2 billion to $3.3 billion.

"The truth is, we’re not satisfied with our performance," Mr. Berthiaume continues. Another factor that contributed to the slump in sales at Standard Life is the lack of visibility in its segregated fund distribution network, he explains.

"Our distribution network says it is satisfied with the quality of our products and our brand. But they also tell us that they don’t see us often enough… It’s certainly one of the reasons behind the decrease in our sales," he admits.

Mr. Berthiaume adds that Standard Life is actively working on turning the tide. "Our game plan for late 2007 and all of 2008 will be to make our presence felt more strongly in our distribution network."

"We plan to hire managers and sales people over the next few months to promote our products, to help the members of our network and to provide after-sale follow up," he continues.

Mr. Berthiaume does not rule out the possibility of Standard Life’s launching a segregated fund that allows minimum withdrawals, similar to Manulife’s IncomePlus. "For now, we’re weighing this option. Nothing has been decided yet because we also have competitive products such as Performance Annuity. We are presently engaged in strategic planning to find the best solution to revive our sales," he says.

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