There is a growing appetite among investors for fund of funds within universal life policies. In the past few years, these professionally managed, diversified portfolio solutions have taken off among retail mutual fund investors. Now the one-stop simplicity of these products is also attracting universal life policyholders.
Within universal life insurance (UL) policies at Manulife Financial, for example, funds of funds are being snapped up. "UL investments in funds of funds have experienced a 35% growth over the last two years," says Paul Smith, vice-president marketing and product development, individual insurance.
With 90 options linked to third party funds, the fund of funds category now makes up one quarter of Manulife’s total universal life assets, or $350 million out of nearly $1.4 billion in assets under management.
Guaranteed interest accounts still form the largest category of universal life investment options at Manulife, with $500 million in assets under management, or 30% of the total assets held in universal life contracts.
And passive indices (S&P/TSX60, S&P 500, EAEO, etc.) have long been a mainstay of the insurer’s universal policies. They currently represent $450 million of UL assets under management.
All the same, the growth of new deposits in passive management index accounts is more modest than in the past, a sign that this category of options has reached maturity. "People are moving away from older indexes to fixed income. They are also moving to funds of funds and asset allocation portfolios, which are becoming the most popular investment options," Mr. Smith says.
Michel Fortin, vice-president, marketing, sales development, retail markets at Standard Life Canada, thinks that funds of funds are popular because they free both insured and advisors from having to closely monitor the investment portfolio within universal life. Instead, with fund of fund products professional fund managers take care of portfolio management tasks such as rebalancing the portfolio and asset allocation decisions. This is often preferable to an investor making their own investment decisions, especially in times of market volatility.
"Fund managers are less emotional about short term market fluctuations. They avoid market timing (buying when the investor thinks the time is right), whereas inexperienced investors always end up buying high and selling low," Mr. Fortin points out.
Joe Kordovi, vice-president and life insurance pricing actuary at Transamerica Life Canada, says that UL investors will base their investing decisions on whether they are looking for wealth accumulation or wealth protection.
Transamerica’s WealthAdvantage UL product focuses on accumulation and imaxx fund of funds represent 38% of assets under management. Meanwhile, in the EstateAdvantage product, which emphasizes protection, these fund products represent only 15% of assets. EstateAdvantage clients, often elderly, take fewer risks and see the advantage of guaranteed interest accounts, Mr. Kordovi adds.
At Transamerica, imaxx funds launched in 2001 are the most popular options in UL, amounting to 28% of total assets in 2007, versus 20% for guaranteed interest accounts
TOP fund portfolios, which track the returns of third party funds, are also quite popular. In EstateAdvantage, balanced TOP predominates. WealthAdvantage features more of a mix between balanced, growth and aggressive growth TOP.
Standalone funds strong
At AIG Life Canada, "Individual funds are more popular than funds of funds in our UL policies," states Steve Carter, vice-president and pricing actuary, life insurance products.
Mr. Carter doesn’t see a marked trend toward funds of funds in universal life at his company. Today, options based on these funds account only for 10% of assets under management within the universal policies, he points out.
This is because the universe of over 400 mutual funds accessible through AIG’s universal policies allows advisors to offer clients diversification without using funds of funds.
At the same time, Mr. Carter notes that guaranteed interest accounts also remain very popular among universal life investors.
Daniel Duchesne, senior marketing representative, individual insurance at AIG Life splits universal life products into two camps. The first consists of policies that focus on insurance protection, often aimed at the family market.
"New deposits in these policies go into fund of fund portfolios," Mr. Duchesne, explains. This way, advisors can shield their clients from overexposure to volatile sectors or securities, while policy monitoring is made simpler by automatic readjustment.
The other policy type is intended for accumulation of tax-free earnings. "In wealth management markets, deposits often reach hundreds of thousands of dollars in unique premium or distributed over several years. These insured are active investors that want to create their own investment portfolio based on specific individual funds," Mr. Duchesne continues.
At Sun Life Financial, Gregor Grant, director, product development and individual insurance products, said in an email that he has actually seen a movement from Balanced to Canadian Equity and additional inflows into U.S. Equity portfolios, and suggests that clients may be engaging in market timing.
Presently, 50% the assets in Sun Life’s universal life portfolios fall into the Managed Balanced category, 29% in the Managed Equity category, 12% in Managed International, 8% in Managed Fixed and 1.5% in Managed U.S. Equity.
Patrick Cloutier, vice-president, sales and business development, at Groupe Cloutier, a Quebec-based managing general agency, prefers portfolio building using standalone funds over fund of funds. "The market is made up of advisors with mutual fund experience. They know how to put together a portfolio with individual funds."
For accumulation-minded clients, universal life also offers third party agreements between insurers and fund companies, which provide access to standalone funds that many individual investors could not afford otherwise, Mr. Cloutier continues. "The Canada Life product gives investors access to three ABC Funds managed by the renowned manager Irwin Michael, for an annual deposit of $500. For investors outside universal life, the ABC Fundamental-Value fund, for example, requires a minimum deposit of $150,000."
Sun Life’s UL product includes the funds of Phillip Hager & North. For one such growth fund, the deposit required outside the policy is $25,000, Mr. Cloutier points out.