Best seg funds of 2024 leaned on Magnificent 7

Investors Group ranked second, with 72.2% in first- or second-quartile assets. It was followed by RBC Insurance at 69.7%. Four others were between 62.2% and 65.3%, including Industrial Alliance Investment Management, which had AUM of $29.7 billion at Dec. 31, 2024.

The other two big families, Manulife Investment Management (AUM of $36.5 billion) and the three Canada Life brands ($29.8 billion) — Canada Life, Great-West Life (GWL) and London Life — fared less well. Only 40.1% or less of AUM were in above-average performing funds.

Equity gains were dominated by the Magnificent Seven technology companies — Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Nvidia Corp., Meta Platforms Inc. and Tesla Inc. If you didn’t have healthy exposure to them, as was the case for Manulife, Canada Life’s three brands and value stock picker Empire Life, you were likely to underperform.

These seg families have a focus on risk management. “Diversification is key to minimizing downside risk,” said Sanjiv Juthani, head of product management at Manulife.

Not all seg funds are open to new investors. GWL, London Life and Ivari funds will only continue for the length of their funds’ current contracts.

Here’s a look at last year’s newsmakers.

CDSPI. The funds are all externally managed. Among the 39 seg funds, 31 had above-average returns, with CDSPI Corporate Bond CI Fund, managed by CI Investments, and Global Real Estate Fund, managed by Invesco, posting the highest returns in their categories.

Industrial Alliance (iA) Investment Management. Normally segs mirror results of the firm’s mutual fund family because many seg products are company mutual funds with an insurance wrapper. But this wasn’t the case for iA, where segs managed by iA Global Investment Management (iAGIM) had 64.6% of AUM in above-average performing funds vs. 46.8% for mutual funds managed by iA Clarington.

Pierre Payeur, senior vice-president, head of fund management and oversight with iAGIM credits “good security selection and risk management as well as good asset allocation” for the funds’ success.

One fund that did well was iA Global Equity Fund. It “ranks all securities according to momentum, value and quality and invests in those that score well and above different thresholds, which results in very well diversified portfolios,” said Alex Lamontagne, director of products for individual insurance, savings and retirement.

Another was iA Thematic Innovation Fund. It invests in “large firms well positioned to adapt” to changing environments and “high-growth companies bringing innovation and new technologies to market,” explained Payeur.

Desjardins Financial Security. Although under the same investment management firm, 62.6% of seg-fund AUM were in funds ranked in the top two quartiles – vs. 24.6% for its mutual funds.

One reason was the strong performance of five seg balanced funds managed by Fidelity and Franklin Templeton.

Another was that the seg family has much less AUM in funds with ESG mandates — 5% vs. 20% in the mutual fund family — and in “low volatility income-oriented” funds (zero vs. 20%).

ESG has struggled since the Ukraine-Russia war sent oil and gas prices soaring in 2022. Low volatility funds are good for risk management, but they don’t do well when markets are dominated by surging growth stocks.

Canada Life. Like many seg fund families, Canada Life focuses on three- to five-year returns, explained Brent McClelland, vice-president, portfolio construction and analysis. He notes that their three-year returns were the best of the six biggest seg families.

McClelland said portfolio managers were able to take advantage of high volatility last year, particularly in terms of protecting against downside risks.

Sustainable portfolios managed by J.P. Morgan and the risk-managed portfolios managed by Irish Life performed well.

Active management is key in volatile markets, not just for equities. McClelland noted that the credit spread for high-yield versus investment-grade fixed income narrowed to 70 to 400 bps.

In equities, Canada Life’s portfolio managers look for quality at reasonable valuations, although McCelland said these aren’t currently easy to find.

Manulife. The firm’s below-average investment performance is 2024 “was largely a story about what we did not own in our portfolios,” Juthani said. portfolio managers are bottom-up stock pickers, and they don’t chase current stars. Manulife had some Magnificent Seven holdings, but “we’re not overweight.”

The approach is similar on the fixed income side, with no aggressive bets. “Overall, Manulife funds provide core building blocks without outsized risks. Downside protection is very important,” Juthani said.

Juthani anticipates even more volatility in 2025 given the level of uncertainty about tariffs and whether central banks will decide to slow down the rate easing cycle.

Empire Life. The company is a value shop that “mitigates risk by buying high-quality companies at a discount to their intrinsic value,” said Paul Holba, senior vice-president, chief investment officer. This isn’t a recipe for beating your peers in a surging equity market dominated by a few growth stocks.

Portfolio managers don’t, however, ignore major themes like artificial intelligence, where they are investing in nuclear energy and the infrastructure required to power the technology. Michael Harber, director, investment research, mentioned AtkinsRéalis Group Inc., a global leader in nuclear power plant engineering and Cameco Corp., a large uranium producer.

Holba said Empire will continue with its low-risk value approach for most of their internally managed funds. But the firm is adding to its shelf to provide more options, such as funds managed by Fidelity, Canoe and Vanguard — and plan to launch more this year.