Skip to main content
Open this photo in gallery:


When markets are volatile and head south, many investors climb the proverbial wall of worry. Some abandon the markets and head for the safety of cash and cash equivalents. Others remain invested, but ride out volatile conditions in anxiety. Can those who are invested in segregated funds sleep better at night?

Amlan Chowdhury, an investment analyst with Meadowbank Asset Management Inc. in Toronto, points to the built-in protection against losses as one of the key benefits of seg funds. “This is an attractive feature for investors who want growth as well as downside protection on their investments.”

Such protection comes in the form of maturity guarantees provided by seg funds. Normally, guarantees are for 75- to 100-per-cent payout of the principal sum invested at maturity or death. The maturity period, which may be linked to the level of the payout, usually ranges from 10 to 15 years. The cost of the guarantee typically rises along with the payout.

This year’s market roller coaster has been a stark reminder for many investors that stocks don’t go up forever. For clients who have been reminded of their aversion to risk, seg funds are worth considering.

“During the recent bull market, many investors who chose to invest aggressively in lower fee products like mutual funds and [exchange-traded funds] when the markets were rising felt the pain of the stock market decline,” says Raymond Yates, senior financial advisor at Save Right Financial Inc. in Vaughan, Ont.

In contrast, he says investors in seg funds, which have similar investment objectives, management and return profiles as mutual funds, “were left relatively unscathed.”

In addition to the benefits of downside protection, higher values can be locked into seg funds during the lifetime of the insurance contract. That’s because the funds have a feature that resets the maturity guaranteed value of the insurance contract on each anniversary date, or less frequently depending on the specific product. The maturity date of the contract may also reset at the same time.

“The guarantees are why segregated funds stand out from other investments like mutual funds and equity securities,” Mr. Yates says. “Investors in [seg funds] can afford to ride out the ups and downs of the market, knowing that they have downside protection as well as the potential to lock in gains when the markets are rising.”

One of the major benefits of seg funds is the downside protection offered by reducing the effect of sequence risk, or the timing of withdrawals from a retirement or similar account says Tim Prescott, president of Quadrus Investment Services Ltd., a subsidiary of Canada Life.

“If you happen to commence withdrawals from your retirement account when the markets are down, then you will be withdrawing money from an account whose value has declined,” he says.

As such, investors could run out of money earlier than anticipated because withdrawals are based on the lower account value. Plus, the returns on the amount of money that remains invested while withdrawing funds will be lower. Investing in seg funds that have guaranteed contract values, in some cases, “reduces the impact of sequence risk,” Mr. Prescott says.

Some advisors don’t worry as much about downside protection. “In spite of periodic declines, the markets have always recovered over time to provide returns that can be higher than those offered by segregated funds,” says Prem Malik, financial advisor at Toronto’s Queensbury Securities Inc.

Still, Mr. Chowdhury says, “it comes down to the personal goals of investors, which might simply be based on having a pool of money in an investment they do not have to worry about losing.”

Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.

Interact with The Globe