The performance last year of segregated fund assets under management by Canada’s largest seg-fund provider was hardly stellar, but executives of London, Ont.-based London Life Insurance Co. are not running for cover.

London Life had only 34.3% of its long-term seg fund AUM in the first or second performance quartiles in 2005, according to an analysis of data provided by Morningstar Canada. This partly reflects the influence of Mackenzie Financial Corp. of Toronto, which manages more than 10% of London Life’s long-term seg assets. Mackenzie Financial had just 20% of its seg fund AUM in the top two quartiles.

In any event, London Life’s funds are designed to do “exceptionally well” in weak stock markets and a little less than average in good markets, says Alf Goodall, vice president of marketing at London Life.

London Life also has the advantage of a captive sales force that sells only London Life products. They can concentrate on explaining to clients how the funds are designed to perform. The company’s seg fund AUM increased about 20%.

Waterloo-based Equitable Life Insurance Co. of Canada’s funds had a tough 2005. Only 4.3% of long-term seg fund AUM were in the first or second quartiles. Kingston-Ont.-based Empire Life Insurance Co. was also weak, at 35.7%, the second year it has been below 40%. Desjardins Financial Security came in at only 29.3%. Desjardins and Mackenzie were also weak in 2003 and 2004.

But the year spelled good fortune for other managers. For instance, all six of Toronto-based Primerica Financial Services Ltd. ’s funds had above-average performances.

TD Mutual Funds of Toronto and Montreal-based Standard Life Assurance Co. of Canada also did extremely well, both with more than 90% of seg fund AUM in the top two quartiles. For Standard Life, that was a major turnaround from 28.2% in 2004 and 23.4% in 2003.

Nor was there anything shabby about the performance of Co-operators Life Insurance Co. of Regina, Quebec City-based Industrial Alliance Insurance and Financial Services Inc., Vancouver-based Industrial Alliance Pacific Insurance Co. and Transamerica Life Canada of Toronto, all with more than 75% of assets in top quartiles.

The turnaround at Standard Life was the result of good sector weightings, including an overweighting in energy, and “very good stock picking,” says Jean-Stéphane Parent, manager of investment product development and management.

Sales were slow at the beginning of 2005 but picked up speed in the summer, helping to push long-term seg fund AUM to $1.9 billion as of Dec. 31, an increase of 22.2% from a year earlier. Parent thinks the acceleration is partly because of the improvement in performance. But the biggest-selling funds are those with consistently good performance or in currently hot categories.

Ideal Canadian Dividend Growth Fund, the company’s biggest fund at $508.5 million in AUM as of Dec. 31 and in first performance quartile for one, three and five years, had the highest net sales in 2005. It was followed by Ideal Monthly Income Fund, with above average performance since its launch December 2003 and $66.6 million in AUM at Dec. 31. Ideal Canadian Small Cap with $97.3 million in AUM; and with first quartile performance for one, three and five years, is also selling well.

On the other hand, two big funds are still in net redemptions — Ideal Canadian Equity, in the first quartile in 2005 but in the third or fourth quartiles for three- and five-year periods ($294.5 million in assets as of Dec. 31), and the $499.3-million Ideal Balanced Seg, still in the fourth quartile.

Canada Life Assurance Co. of Toronto is another turnaround story, with 71.6% of long-term assets in the first or second quartiles in 2005 vs 44.2% in 2004 and only 20.2% in 2003. In this case, changes were made in both managers and mandates after parent Canada Life Financial Corp. was acquired in 2003 by Great-West Lifeco, says Goodall, who is also vice president of marketing at Canada Life.

There is now a focus on income funds, with some new ones added in November. A real estate fund, which holds property rather than real estate investment trusts, was also launched in November.

In addition, the growth equity style used by many Canada Life managers was in favour last year, says Goodall. Toronto-based Laketon Investment Management Ltd. , one of its major managers, made a good call on energy, he says. Goodall says this is a combination of skill and good fortune, and points out that the energy call was “hard to make.”

@page_break@Ninety-three per cent of the assets managed by Laketon were in the first or second quartiles, as were 100% of the AUM managed by Fidelity Investments Canada Ltd. , another major manager, says Goodall.

Canada Life’s assets were affected by transfers of some of its group seg assets to London Life, resulting in a 22.6% drop in overall seg assets. Individual seg fund assets, however, were up 13.2%.

“The market is ready for another major seg fund player,” he says. There is also better wholesaling support and lots of new sales concept ideas for advisors. In addition, management expense ratios have been reduced by an average of 43 basis points, including GST, on 16 funds and MERs were recently trimmed by eight-10 bps on six or seven other funds.

Desjardins Financial Security, whose seg-fund family is called Millennia III, has also made major changes in its money management, says Michael Aziz, regional vice president of sales. In 2000, the company started adding outside money management and in 2003 went entirely to outsiders. It sold off Elantis Investment Management Inc., the subsidiary that had been managing the funds, to newly formed Montreal-based Fiera Capital Management Inc. in exchange for a 30% stake of Fiera, which still manages about 40% of the Millennia assets.

The rest is divided among nine other firms, chosen for their long-term track records, credibility and ethics. Desjardins closely monitors outside managers with quarterly reviews done by senior management and representatives of Desjardins Global Asset Management.

Aziz says the company isn’t “too concerned” about the weak performance numbers of the past three years.

Many funds didn’t hold income trusts and many were underweight in energy. In addition, the focus is on capital preservation so they will take some underperformance on the upside if it means better performance on the downside. The seg family reported net sales in January after being in net redemptions in 2005. Assets were up 5.9% on Dec. 31 from 2004.

Sales were strong for some performance laggards. This includes Mackenzie, with assets up 67.8% and Empire Life, with an increase of 35.9%. Mackenzie is a very small player in the seg-fund arena so big sales increases don’t mean huge amounts of dollars.

The company has had similar performance results in its large mutual fund family, where net sales aren’t buoyant but have remained positive.

Good relationships

David Feather, president of Mackenzie Financial Services Inc. in Toronto, puts this down to good relationships with advisors and the recognition of Mackenzie’s good long-term record.

Empire Life Insurance of Ottawa sold down its energy positions in 2005, and the companies it retained, such as Canadian Oil Sands Trust and Encana Corp., didn’t participate in the energy bounce back in the fourth quarter, says Deborah Frame, vice president of investments. But Empire Life still likes the companies and is keeping them. Frame also notes that its basket of stocks did much better in January.

Empire Elite Equity, its biggest fund with $940.3 million or 33.6% of the company’s long-term AUM as of Dec. 31, is now a third-quartile performer over three years, but just barely. The median return for three years for Canadian equity seg funds is 15.2%; Elite Equity returned 15.1%. Frame doesn’t expect it to remain third quartile on three years for long.

The Empire Small Cap Equity Fund, with $183 million in assets as of Dec. 31, slipped into the third quartile in 2005, although it remains first quartile on three and five years. Frame notes that it is considered a large-cap fund by Morningstar and other fund statistics providers because the average size of its holdings is a little above the cutoff for a small-cap fund.

In addition, fund manager Scott Morrison sold off the fund’s energy holdings this year. Given that, Frame considers the fund’s return of 14.5% vs 17.3% for seg large-cap Canadian equity “spectacular.”

Another big fund, Empire Balanced Fund, with $340.7 million in AUM as of Dec. 31, is hovering around below-average performance with a return of 9.3% vs 9.2% for Canadian balanced seg funds.

Frame says its mandate is to hold no more than 60% in equities. Many Canadian balanced funds with above-average performance had more than 60% in equities. IE