There are two systems designed to look at the performance of segregated fund families. But regardless of which you use, Toronto-based Primerica Life Insurance Co. of Canada emerges with the family of top-performing seg funds in 2006.

This past September, Morningstar Canada introduced a new method of categorizing seg and mutual funds, a system that is markedly different from the traditional system developed by the Canadian Investment Funds Standards Committee. The traditional system is still used by some data providers, such as Globe Interactive, owned by the Globe & Mail and marketer of Globe HySales software, which is used to rate funds.

The issue is that, depending on the asset mix in an individual fund, a fund may be ranked in different categories under the two systems, which can affect the overall performance of some fund families.

Negotiations are underway between Morningstar and CIFSC to devise a single rating system by mid-year. In the meantime, there are enough discrepancies between the two systems that investors and advisors should look at both when trying to get a feel for the performance of funds and their families.

Although each of Primerica’s six seg funds earned first- or second-quartile performances in 2006 when using either categorization system, the differences in categorization weren’t as kind to some companies, which saw their performances vary widely depending on which system is used.

In 2006, using both systems, the seg fund families of Empire Life Insurance Co. of Kingston, Ont. and Waterloo, Ont.-based Equitable Life Insurance Co. of Canada bounced back after a few years of low performance. And at Canada Life Assurance Co. of Toronto and Industrial Alliance Insurance & Financial Services Inc. of Quebec City, more than 50% of long-term seg fund assets under management had above-median performance.

However, in the case of these four companies, performance numbers were higher using Morningstar data, which reflects — at least, partly — that Morningstar does separate ratings for seg funds, while HySales rates them together with mutual funds. Indeed, only two of 16 seg fund suppliers had better numbers using HySales data — SSQ (Société d’assurance vie), based in Quebec City, and Standard Life Assurance Co. of Canada of Montreal.

Transamerica Life Canada and TD Asset Management Inc. , both of Toronto, Winnipeg-based Great-West Life Assurance Co. and Co-op-erators Life Insurance Co. of Guelph,Ont. all posted weak results under both sets of categories, although they fared better with Morningstar — dramatically so in the case of TD.

The two systems make a big difference for CI Investments Inc., Desjardins Financial Security and Mackenzie Financial Corp. , all of Toronto, Standard Life, London Life Insurance Co. of London, Ont., and Waterloo-based Manufacturers Life Insurance Co. .

CI looks good using Morningstar data, with 59.2% of long-term seg fund AUM above median, but it looks weak using HySales (only 38.1% above median).

Desjardins, London Life and Manulife are in the “respectable” 42.5%-45.6% range of long-term seg fund AUM above median using Morningstar, but have less than 35% using HySales.

Mackenzie had 41.1% of long-term seg fund AUM above median using Morningstar, but just 17.5% using HySales.

Standard Life has a respectable 43.1% of long-term seg fund AUM above median using HySales, but just 13.2% under Morningstar.

A look at Standard Life Ideal Balanced Fund shows how the different categorization systems can affect individual funds. This fund, with $488 million (20.8%) of Standard Life’s $2.3 billion in seg fund AUM as of Dec. 31, is ranked in the second quartile by HySales and in the third quartile by Morningstar. Furthermore, the fund’s return of 9.7% for the year ended Dec. 31 is only slightly below the 9.9% median for the “Canadian portfolio” category in which it is slotted by Morningstar. That accounts for most of the difference in Standard Life’s seg fund family performance as measured by the two sets of data.

Standard Life is conducting some research, both internally and with Morningstar, to make sure the mandates of its funds match the requirements of the Morningstar categories. Carlos Da Costa Frias, consultant with Standard Life’s product-development team, and company actuary Stéphane Jutras note that Standard Life Ideal Canadian Equity Fund, for example, with $303 million in AUM as of Dec. 31, was a first-quartile performer before the change in Morningstar’s ratings; it has since dropped to third. HySales has it high in the second quartile.

@page_break@This fund is second-quartile over three years and first-quartile over two years under the Morningstar system, although third-quartile over five and 10 years.

Standard Life seg fund sales remain good; indeed, the company exceeded its sales targets, which it describes as “aggressive,” in 2006.

Advisors also need to look at funds’ longer-term track records to assess performance accurately. Many companies are focused on longer-term, risk-adjusted results and accept the occasional dip in performance.

Standard Life is one such firm. It is looking for solid long-term performance over three, five and 10 years, and that’s what it gets from Standard Life Investments Canada, which manages its funds. The investment style used by the fund manager — core and value — is very much like that used by pension funds, Standard Life notes.

For example , Standard Life Ideal Canadian Dividend Growth Fund is first-quartile under the Morningstar system over the five years ended Dec. 31, with an average annual return of 11.8%, but it’s third-quartile over three years.

Transamerica is another company that looks for consistent long-term returns. It is a conservative manager that worries more about protecting against downside risk than in keeping up with the competition in strong markets.

“We expect that if markets go down, we wouldn’t go down as much,” says Geraldo Ferreira, vice-president for investment products development and marketing at AEGON Fund Management and Transamerica.

He considers Transamerica’s relatively weak seg fund performance in 2006 an anomaly; certainly, the data do not contradict this. The fund family had 77.3% of long-term seg fund AUM above median in 2005 under the Morningstar system, 75.7% in 2004 and 64.2% in 2003.

The drop in nominal performance doesn’t concern Ferreira, who points out that absolute returns were still high. For example, Trans GS2 Global Growth Fund, the firm’s largest fund, with $536 million in AUM as of Dec. 31, had a 10.9% return in 2006 according to Morningstar. Although that’s well below the median 15.3% return for the “global equity” category, it’s still a good return.

Ferreira also points out that Trans GS2 Global Growth Fund has the latitude to invest a portion of its assets in fixed-income and currently has 5% in that asset class. Thus, it is being compared with funds that are 100% equities; indeed, only 11 of 234 global equity funds for which Morningstar has data had 1% or more in fixed-income as of Dec. 31.

Ferreira notes that Transamerica was tied with Manulife and CI in December for the most five-star funds from Morningstar. The stars are assigned based on risk-adjusted returns; five stars is the top rating.

Several other companies also argue that 2006’s weak performance is temporary — and again the data are consistent with this possibility.

Using Morningstar data, Co-operators’ seg fund family had 81.5% of long-term seg fund AUM above median in 2005, 88.6% in 2004 and 92.4% in 2003; it dropped to around 20% in 2006, using both systems.

Returns on Co-operators Bal-anced Fund, which had $120.9 million in AUM in various versions, and Co-operators Equity Fund, which had AUM of $112.3 million, both dropped below median in 2006 from above in 2005, according to Morningstar. The two funds account for 42.7% of the $545.7 million in the firm’s long-term seg fund AUM.

Sales have been increasing by 50% a year, according to David Hart-man, Co-operators’ vice-president of wealth management, partly reflecting the revision to the company’s strategy three years ago. Agents have been given access to investment consultants, who are experienced financial planners, to help them build their businesses. They have been provided with a new family of balanced funds that work as portfolio products. The firm’s seg funds combine different investment styles by using three money-management teams — Co-operator’s own, plus those of Aim Funds Management Inc. and Fidelity Investments Canada Ltd. , both of Toronto.

Manulife, which has the biggest seg fund family after London Life, with $16.7 billion in AUM as of Dec. 31, according to Morningstar, also saw its performance drop after three good years. One reason is the strategies in its MLI E&P Value Equity, MLI E&P Dividend and MLI E&P Monthly High Income funds, all of which are managed in a value style. These funds, which had $2.8 billion (16%) of total long-term seg fund AUM at Dec. 31, all dropped below median in 2006. This doesn’t concern Manulife.

“We have full faith [in the management team’s strategies. The team aims] to produce high risk-adjusted returns over the long term,” says Jeff Ray, assistant vice president, product development, with Manulife Investments in Toronto. IE