As opposed to mutual fund sales that have nosedived since the beginning of the financial crisis, segregated funds are holding steady. Experts agree that seg fund sales are doing better thanks to the sense of security inspired by the guarantees and the popularity of guaranteed minimum withdrawal benefit products.
Iassen Tonkovski, a senior analyst with Investor Economics, a research and consulting firm for the financial services industry, says "
Among the lessons learned during the last bear market (2001-2003) was that while there was no run for the exit — redemption rates remained near historical lows — investors almost immediately went on a ‘buying strike’. Almost five years later, a similar trend in redemptions can be observed," Meanwhile, the segregated fund industry as a whole is experiencing sales stability, he says.
And, those figures do not take into account the massive net redemptions of $8.4 billion reported by The Investment Funds Institute of Canada in its October results (see page 34). As of October, year-to-date net sales were $2.2 billion compared with $30.2 billion at this point last year, states the IFIC report.
What has made the difference between the mutual fund sales meltdown and seg funds stability? There are a number of factors says Mr. Tonkovski. One of them is the capital and death benefit guarantees offered by segregated funds that are reassuring to clients in such volatile conditions.
Another factor is the popularity of seg funds that include new guaranteed minimum withdrawal benefits (GMWB). These products have accounted for more than 80% of seg fund sales so far in 2008, he adds. The additional guaranteed income component of these products accounts for its appeal. "It combines the upside return potential and the downside risk protection offered by segregated funds with an income twist," Mr. Tonkovski adds.
In September, Manulife Financial reported that "in less than two years since its launch, deposits have surpassed $6 billion in GIF Select featuring IncomePlus. The market crisis in October has not impacted sales, said Bob Tillmann, vice-president, marketing and business development, individual wealth management at Manulife. "We’ve seen our sales hang right in…The trend is still good." In addition to steady sales, Mr. Tillmann says each month many new advisors are selling the product for the first time.
Although sales overall have remained steady for the seg fund industry, some insurers have lost market share to their competitors who offer GMWB products, said Mr. Tonkovski.
Rick Forchuk, vice-president, retail distribution for Empire Life said, "Seg fund sales have been below the strong levels achieved last year, but given the state of the markets worldwide, and challenges in the investment markets in this country in 2008, we are pleasantly surprised at the level of deposits being received." In September, Empire was number five in the market in terms of seg fund assets and sales. Empire Life launched its own GMWB product, Class Plus, Oct. 20
Mr. Forchuk adds that during this market crisis, the guarantees offered by seg funds have provided comfort to clients and the advisors who’ve sold them. "Advisors who have always embraced the seg fund model are feeling more comfortable around their clients than some that have sold mutual funds." He adds, "It’s always in times of adversity that the value of insurance and insured products is appreciated."
He recounts a recent situation where an advisor’s client deposited a six-figure amount into a seg fund. Then, just a few months later, the client suddenly passed away. "The client’s beneficiary received the full amount of the original deposit even though the fund itself had slumped some 30% during that time-frame."
The market volatility has sparked increased marketing efforts by seg fund providers who are using the opportunity to raise awareness among advisors and the public about the guarantees that these products provide, added Mr. Tonkovski. This is an opportunity that they missed when the technology bubble burst earlier in the decade, particularly because they were adjusting to the new capital requirements introduced during that period.
Tony Bagnato, vice-president, wealth management, RBC Life Insurance says he believes that "public awareness of segregated funds has grown and we’re starting to see more discussion related to the value of the guarantees of the product. There is still a great opportunity to educate investors on the numerous benefits of segregated funds."
Mr. Bagnato adds that "advisors, both those that have always supported insurance products and those that have typically been supportive of equity products, are definitely showing increased interest in guaranteed products, particularly those that can provide protection in times of market downturns while still providing growth opportunities in times of market booms."
Figures for the first three quarters of 2008 show that segregated fund sales have increased by 2.4% year-over-year, from about $3.95 billion in 2007 to just over $4 billion for 2008 (see inset table).
Meanwhile, the $10 billion in year-to-date September 2008 mutual fund sales accounted for only two thirds of the $30 billion net sales result for the segment during the same period a year ago