Claringtonfunds inc. and Sun Life Financial Inc. are introducing a new type of “life cycle” investment fund in Canada that combines the concept of a guarantee on the principal amount invested with other innovative features such as a resetting of the guarantee as the fund rises in value. The funds have a predetermined life span, and investors who hold to maturity will receive the highest month-end value ever achieved by the fund, even if they buy in after the fund has taken a fall. Every time the fund hits a new month-end high, the guarantee is jacked up, or “clicked,” at a new level.

“The guarantee is available to anyone who purchases these funds, even if they buy in after the high point is hit,” says Eric Frape, Clarington vice president of product development. “The retroactive nature of the guarantee means you can buy the funds in a down market and receive the previous locked-in high, essentially getting the fund at a discount.”

Clarington is offering its product, called Clarington Target Click Funds, in the retail market, while Sun Life has cornered employer-sponsored group retirement and savings plans. The funds are described as life-cycle because they are available with a variety of different terms to suit investors’ savings goals, and assets can be spread across more than one maturity.

The fund manager will alter the asset mix of each fund, which is essentially a balanced portfolio, shifting the emphasis from equities to fixed income as the maturity date draws closer. Funds with a maturity date of 20 years will, therefore, own a higher percentage of stocks after five years than funds with only a five- or 10-year life span that will be wound up sooner.

The products are guaranteed by ABN AMRO Bank N.V., a Holland-based bank with more than $1 trillion in assets and parent of ABN AMRO Asset Management. The bank is among the top 20 in the world, with a history dating back to 1824, and has more than 3,000 branches in 60 countries. The creditworthiness of the bank is an important consideration when it comes to assessing the quality of a principal guarantee, and the bank has an AA- rating from Standard & Poor’s Ratings Services.

The portfolio advisor to the funds is the bank’s Canadian affiliate, ABN AMRO Asset Management, which pioneered the “target click” concept in Europe in 2000 and has introduced the funds in Canada exclusively through Clarington and Sun Life. The funds will invest in three asset classes, including Government of Canada strip bonds, treasury bills and units of the ABN AMRO Global Exposure Fund. The equity exposure is tied to international stock indices in the U.S.,
Europe and Japan.

James Gauthier, a fund analyst at Toronto-based Dundee Securities Corp., calls the funds “a good option for the risk averse.” He says the guarantees are most valuable for the products with a shorter time horizon of five or 10 years, as most asset classes would make money over a 20-year time horizon based on historical performance.

Gauthier says it could be a smart strategy to buy the funds in a down market or after a fall, knowing that in a worst-case scenario they will receive the previous locked-in monthly high and in a best-case scenario the product will go on to new highs.

“It’s unlikely that a balanced fund would experience a huge drop, but there could be a buying opportunity if the fund fell 10% to 20% from previous highs,” he says.

The Clarington Target Click funds, introduced in February, are available as a series and include a range of fixed maturity dates – 2010, 2015, 2020 and 2025. Sun Life is calling its employee-group plan product the Milestone Funds, and introduced seven in April, with maturity dates starting at 2010 and increasing in five-year increments to 2040. Investors or employees with group plans can buy the fund that best suits their time horizon, as it is necessary to hold until maturity to receive the guarantee. The funds have daily liquidity and can be redeemed at net asset value any time, but are not guaranteed if sold prior to the maturity date.

Rick Headrick, Sun Life assistant vice president of investment services, says the Milestone funds can be used for a variety of different goals or “milestones,” and within an RRSP the maturity date can be chosen to match retirement dates. Depending on the group plan, if the employer also offers a non-retirement savings plan, the funds can be used to provide guaranteed nest eggs for major life events such as buying a house, children’s education, or a once-in-a-lifetime trip. The term of the fund can be matched to the desired goal.

@page_break@“The funds offer a level of security because investors know the minimum guaranteed amount that they will have at a certain date,” Headrick says.

Sun Life is offering the Milestone funds along with funds managed by 13 other fund managers in the segregated “group capital accumulation plan” it offers to employers. Its group retirement services division is the leading supplier of retirement plan services in Canada, serving one of every three defined contribution plans.

Altogether, the Sun Life platform includes more than 100 funds from which employers can choose, although the typical employer-sponsored plan includes 12 to 15 investment options, Headrick says. The Sun Life plan is available through financial advisors and insurance agents who offer group plans to clients such as small business owners, professionals or associations which have employees.

Headrick says the guarantees combined with potential upside are encouraging some Sun Life group plan sponsors, who offer a choice of fund managers to their employees, to consider using the Milestone funds as their default product.

Normally, a default product is used in group plans when employees are unwilling or unable to choose their own funds, and the default option is frequently a low-risk money market fund.

Essentially, both the Clarington and Sun Life funds will protect clients from market fluctuations while providing the long-term growth opportunities and asset allocation of a balanced mutual fund portfolio. While there are other funds in the market that are described as “lifestyle” funds, they are typically asset-allocation programs where investors can choose a mixed portfolio of funds that is matched to their individual investment objectives. Often, the same sponsor will offer a mix of multi-fund portfolios, and the investor can move along a risk tolerance scale from low-risk, low-return to aggressive. The mixed portfolios do not typically have maturity dates or change their asset allocations with time; it’s up to the investor to switch to a different portfolio or wrap program as objectives and risk tolerance change.

Other products such as principal-protected structured notes, also have maturity dates and principal guarantees upon redemption, and can be purchased with a maturity date in mind, as can fixed-income investments such as bonds and mortgage-backed securities.

However, these products do not come with a lock-in feature that captures the investment gains made along the road to maturity.
Investors can usually sell fixed-income securities and structured notes before maturity and receive market value, but it may be more or less than the principal amount invested.

Unlike principal-protected notes, which have been criticized for complex layers of fees, the Clarington Target Click Funds have a straightforward and reasonable management fee. What’s interesting is that the fee declines over time, as the percentage of equity exposure drops in the portfolio. For example, the series maturing in 2025 has an estimated MER of 2.85% for the first five years, which should fall to 2.6% for the next five years and 2.55% for the following five years. For the next two years it’s estimated at 1.9%, and in the final year at 1.25%. Over the 20-year lifetime of the fund, the MER should average 2.5% to 2.6%, Frape says.

Morningstar Canada says the average MER for global balanced segregated funds (which also charge for a guarantee of principal upon maturity) is 3.3%. The average MER on regular global balanced funds without a guarantee is 2.5%.

At Sun Life, the fees are negotiated with the client who is providing the employer-sponsored savings plan, and depend on the client’s purchasing power.

Cash flow into the plan and balance per participant are considerations, but Headrick estimates the fees range from one-third to one-half of the level of retail funds. Sun Life’s fees also decline in increments as the funds move toward the maturity date.

“In some ways we are bringing ‘defined benefit’ to the ‘defined contribution’ market,” Headrick says, referring to the fact that the guarantees allow participants to know the minimum amount of assets they will have in the Milestone funds at a future retirement date and can plan their retirement income accordingly. IE