Segregated funds are going global. Will investors follow?
With Canada representing only 3 per cent of global markets, Canadians’ portfolios have a significant home-country bias. Investors need to diversify to take advantage of global growth and more industries.
For investors with an appetite for low-risk access to emerging markets growth, seg fund guarantees with an international focus can sound appealing. That’s especially true during volatile economic times. Call it diversification with a safety net.
“If you were not comfortable with the risk [of global equities] and you don’t have international diversification already, that would be a reason why you might want to do it,” says Bruce Campbell, chairman of Campbell Lee & Ross Investment Management in Oakville, Ont.
Some older clients – usually those who are at least 80 of age – like the idea of buying seg funds and having the money flow tax-free directly to their estate when they get the death benefit guarantee, he says.
Not everyone is sold, though. Brian Gribben, principal advisor at Brian Gribben Insurance Planning in Ajax, Ont., says many clients with an interest in seg funds tend to shy away from the idea of global diversification.
“I find there is enough uncertainty in the equity market even with what is going on overall in North America,” Mr. Gribben says. “Once you start adding a currency exchange risk on top of an equity risk … I find my clients are pretty conservative and I have very little money in global funds at all. Unless it happened to be a balanced fund that had a little bit of a global holding.”
Although seg funds are sold as deferred variable annuity contracts, the underlying assets are in many ways no different than those in some of the best managed investment funds. As such, these assets must address some current themes in the marketplace. One of those is the need to go global.
For example, Canada Life just launched nine new globally-focused seg funds “to fill some gaps in our lineup, allowing clients more ways to access a broader range of opportunities,” says Steve Fiorelli, the company’s senior vice president of Wealth Solutions.
He sees two scenarios in which a global seg fund might appeal to people approaching retirement.
One is an investor who doesn’t want to be completely out of global markets, but “wants to know they have some sort of floor in place on their principal investment as opposed to just parking in [guaranteed investment certificates],” Mr. Fiorelli says.
The second scenario is widespread expectations of low interest rates remaining in place for a long time to come.
“People need more yield. They’re realizing there is going to be a huge shortfall in their retirement nest egg savings, and they have to go out and take more risks in order to grow their nest egg successfully,” Mr. Fiorelli says.
Global seg funds let investors get a bit more aggressive with diversification, yet have more comfort without opting for a guaranteed product that’s going to provide a much lower return, he says.
While seg fund characteristics appeal to certain clients, some financial experts point to a host of other global investment options that offer similar returns with much lower fees.
For every seg fund there is a corresponding or underlying mutual fund and probably a dozen exchange-traded funds (ETFs), says Eric Kirzner, the John H. Watson Chair Emeritus in Value Investing at the University of Toronto’s Rotman School of Management.
“If you want to build a globally diversified portfolio, which for most people is a suitable strategy, there are all kinds of ways of doing it,” he says. “If you’re promoting a seg fund, what you’re going to be promoting is the guarantee, the asset protection and the insurance aspects of it.”
For Mr. Fiorelli, however, investors shouldn’t think of globally-focused seg funds in an all-or-nothing way.
“What people are asking themselves more and more is where do they want to take their risks, and where do they want to take some risk off the table? With these markets being as volatile as they are, many are asking if there is a way of balancing that out in a more prudent way,” he says. “I’m not saying go 100 per cent seg funds or 100 per cent ETFs, because there is a way of balancing that out in their portfolios. Advisors tend to approach these tradeoffs in a prudent and strategic way.”
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