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Sun Life Financial Inc. shares rallied on Wednesday and the reason is clear: The company may have halted recent outflows from its large U.S. asset-management division, winning plaudits from analysts. But will the improvements keep coming?

That's an open question, given that it is still unclear whether Sun Life is a victim of a long-term shift toward passive investing or merely caught in a brief period where institutional investors have been rebalancing their holdings.

Let's do some unpacking here.

First up, Sun Life shares have been in a slump over the past six months. After hitting a record high of more than $52 in mid-November, the shares began to decline in early February. By Tuesday, they were down by 15 per cent.

Part of the problem is that investors have been stoked about the prospect of normalizing money policy in the United States, where the Federal Reserve has raised its key rate three times and appears on track for additional rate increases as the economy improves.

Banks and insurance company profit tends to rise when interest rates are headed higher. However, tumbling U.S. bond yields over the past three months suggest that the initial fervour over rate increases is now cooling, giving investors second thoughts about banks and insurance companies.

But Sun Life, in particular, has also been struggling with its asset-management division, which offers mutual funds and investment services for retail and institutional clients, and generates more than 30 per cent of Sun Life's profit.

The problem? When Sun Life reported its first-quarter results last month, it showed that its U.S.-based MFS Investment Management division – the 10th largest U.S. mutual-fund manager and 24th largest money-management firm – experienced an eyebrow-raising outflow of $11.1-billion (U.S.) in assets during the quarter.

This was no one-off event: The same division experienced an outflow of $9.5-billion in the previous quarter – which looked to some observers like a troublesome trend and a reason to expect weaker profit.

Sun Life's management has a hopeful explanation: Following an impressive stock-market rally – the S&P 500 has risen nearly 17 per cent since the U.S. presidential election in November – institutional investors have been rebalancing their portfolios by selling equity funds and buying fixed-income products.

"You will see periods where you do have a big spike in equities," Michael Roberge, chief investment officer at MFS Investment Management, said during a conference call with analysts in May. "You get de-risking within the [defined-benefit pension] world, and so clients will take advantage of the increase in equity values."

A less hopeful theory is that institutional investors have been moving away from actively managed funds and toward cheaper investments that track indexes – a trend that could accelerate.

This theory explains why Sun Life's shares have been slumping in recent months. But it also explains Wednesday's rally. The shares closed at $45.42 (Canadian) in Toronto, up $1.59 or 3.6 per cent, the most in six months.

The gains follow reports that assets under management at MFS rose by 4.2 per cent in the first two months of the second quarter, outpacing the gain in the S&P 500 and suggesting good things for asset flows.

Darko Mihelic, an analyst at RBC Dominion Securities, estimates that these two months translate into retail net inflows of $500-million (U.S.) and institutional outflows of $1.1-billion.

"This represents a significant improvement" over the previous two quarters of outflows, Mr. Mihelic said in a note. He upgraded his recommendation on Sun Life to "outperform" from "sector perform," but left his price target unchanged, at $51 (Canadian).

Paul Holden, an analyst at CIBC World Markets, noted that MFS is holding up better than the wider mutual-fund industry, which implies a higher valuation than its peers. He believes Sun Life's share price could rise as much as $6 (from Tuesday's level) if MFS can shut the door on asset outflows.

So far, so good – but cautious investors may need more evidence.

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