FUND FAM­I­LIES Some seg fund fam­i­lies out­per­formed in 2017.

Some firms with smaller seg fund fam­i­lies — es­pe­cially RBC, Sun Life and Co-op­er­a­tors — out­per­formed in 2017

Investment Executive - - FRONT PAGE - BY CATHER­INE HAR­RIS

the as­set-man­age­ment firms that had seg­re­gated fund fam­i­lies that pro­duced the strong­est in­vest­ment per­for­mance i n 2017 re­lied on good stock-pick­ing and the right as­set al­lo­ca­tion for their suc­cess.

Royal Bank of Canada’s (RBC) seg fund fam­ily was the top per­former last year, with 89.4% of long-term as­sets un­der man­age­ment (AUM) held in funds that ranked in the first or sec­ond per­for­mance quar­tiles, ac­cord­ing to data from Morn­ingstar Canada. (All firms are based in Toronto un­les oth­er­wise noted.)

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 l ong-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 i n 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 l ong-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 f unds ben­e­fited from over­weight­ing eq­ui­ties and “su­pe­rior se­cu­ri­ties s e l e c t i o n ,” 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.

c o - o p e r ato r s 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 f a m i l y ’s p e r f o r m a n c e w a s en­hanced by sev­eral of its largest seg funds, says Brent Wil­son, di­rec­tor of in­vest­ment re­search and anal­y­sis, i nvest­ment 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.

Ma n u l i f e Mo n t h l y Hi g h In­come’s strong per­for­mance, for ex­am­ple, was “pri­mar­ily be­cause of strong stock se­lec­tion, high­qual­ity 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 longterm AUM held in funds ranked in the first or sec­ond per­for­mance quar­tiles in 2017.

Pierre Payeur, di­rec­tor of fund man­age­ment with Que­bec City­based 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 i n 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 i mpor­tant 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 i n 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 i n 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 i n 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 i n more fixed­in­come 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.

“Our seg funds tend to of­fer high-qual­ity stock se­lec­tion and can be de­fen­sive to pre­serve cap­i­tal”

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.