It was a good year for stock-picking for a number of managers of segregated funds. As a result, the performance of most seg fund families was solid in 2007, with all but two of the 16 companies examined reporting more than 40% of long-term assets under management in the first or second performance quartile.

Martin Hubbes, chief investment officer at Toronto-based AGF Funds Inc. — which manages the six Asset Builder funds offered by Mississauga, Ont.-based Primerica Financial Services Ltd. , leader of the pack among seg funds in 2007 — credits holding the right stocks for the excellent performance, including seven of the 10 stocks that were responsible for most of the gain in the S&P/TSX composite index in 2007, among them Agrium Inc., Alcan Inc., BCE Inc., Potash Corp. of Saskatchewan Inc. and Research in Motion Ltd. The Primerica seg funds also held the right banks — Bank of Nova Scotia, Royal Bank of Canada and TD Bank Financial Group.

As a result, all six of the Asset Builder funds turned in above-average returns for the year ended Dec. 31, 2007. In the previous year, only four of the six had above average performance, which worked out to just 41.6% of long-term AUM in funds with first or second quartile performance.

Montreal-based Standard Life Assurance Co. of Canada’s seg fund family did almost as well as Primerica’s, with 97.2% of AUM in funds with above-average performance. Standard Life’s improvement was almost as great: in 2006, it had 41.9% of long-term AUM in funds in the top two quartiles.

In some instances, the conservative investment style of most seg funds also helped. This was the case for the Transamerica funds, says Geraldo Ferreira, vice president of investment products development and management for AEGON Fund Management and Transamerica Life Canada in Toronto. These funds tend to do better in volatile markets, he says, noting: “In bull markets, we tend to lag on a relative basis.”

The Transamerica funds had 62.4% of AUM in first- and second-quartile funds in 2007, up from 28.5% in 2006.

On the other hand, the conservative approach of Quebec City-based Industrial Alliance Investment Management Inc. didn’t pay off in 2007. “We were too early in setting up a defensive posture,” says François Lalande, IA’s vice president of portfolio management. The company’s funds were overweighted in financial stocks, usually a safe way to play an economic slowdown and the accompanying drops in interest rates.

But its biggest fund, IA Ecflx Diversified, was barely in the third quartile, with a 0.2% loss vs the median loss of 0.1% for the neutral balanced seg fund category. The IA fund has $1.2 billion in AUM, which represents 12.8% of IA’s total long-term AUM in funds that were ranked by Morningstar Canada in 2007.

As with conventional mutual fund families, some seg fund families benefited from changes in the Canadian Investment Funds Standards Committee’s categories used to rank performance.

A year ago, there were two ranking systems being used — the old CIFSC categories and ones that Morningstar had created because it wasn’t happy with the CIFSC’s. In June 2007, new CIFSC categories were agreed upon and all fund ranking providers now use them.

The most important change was dividing the balanced funds category into three — equity focused, neutral and fixed-income focused. That means that seg balanced funds, which tend to be conservative with relatively high weights in fixed-income, are now being compared with smaller groups of funds that have relatively similar asset mixes rather than against all balanced funds.

Those fund categories no doubt had an impact on rankings and sales in 2007. Primerica fared well under the new system, for instance. Using both the old CIFSC categories and Morningstar’s 2006 categories, Primerica’s funds were above average. So, performance figures were positive for sales going into 2007.

As a result, Primerica reported net sales of $400 million in 2007 and its AUM rose by 25.1%, says Jeff Dumanski, Primerica’s president and chief marketing officer. He puts this increase down not just to performance but also to the company’s life-cycle funds, which have proved popular with investors.

Primerica’s Asset Builder funds consist of strip bonds to cover the principal guarantee, and equities to provide growth. The longer the term to maturity, the more equity is in the funds. That means that returns are usually better for the funds with the longest maturity.

@page_break@It’s not the same story for Standard Life. Its AUM was up by just 6.2% year-over-year to $2.5 billion. Part of the reason lies in the rankings that were published a year ago for the 12 months ended Dec. 31, 2006 — and which inves-tors were using to make their fund choices.

Standard Life had only 43.1% of long-term AUM in funds with above-average performance using the old CIFSC categories and only 13.2% using Morningstar’s 2006 categories — which would not have helped 2007 sales.

A number of other seg fund families with good performance gathered more assets in 2007. Both Kingston, Ont.-based Empire Life Insurance Co. , with 71.3% of long-term AUM in funds in the first or second quartile in 2007, and Equitable Life Insurance Co. of Canada of Waterloo, Ont., with 58.2%, had big jumps in AUM of 18.2% and 23.6%, respectively.

But IA wasn’t far behind Equitable, with a 15.5% increase in AUM in 2007, even though only 44.8% of its long-term AUM were in funds with above average performance.

The other firm with a big gain in AUM year-over-year was Manufacturers Life Insurance Co. , with a 13.6% jump. That’s very impressive for such a big seg fund family — it has $18.7 billion in AUM. Only London Life Insurance Co. is bigger, with $21.7 billion in AUM, and its AUM was up only 3% in 2007, even though it had more than 50% of AUM in above-average funds.

Michael Ondercin, assistant vice president of segregated funds at Manulife in Waterloo, Ont., believes the introduction of the GIF Select IncomePlus funds in late 2006 is responsible for the surge.

These funds offer an income guarantee rather than a principal guarantee. The funds are offered both with terms to maturity and with lifetime guarantees. They are similar to variable annuities in the U.S., which have attracted about US$170 billion. Ondercin notes that much the most popular kind south of the border are the ones with lifetime benefits.

In 14 months, Manulife’s GIF funds have attracted $3.5 billion, considerably more than the $2.2 billion in AUM Manulife added in 2006. Some investors switched to GIF funds from Manulife seg funds.

Portfolio funds also found favour with investors. Lucilla Watson, director of wealth and estate planning sales development for individual insurance and wealth management at Co-operators Gen-eral Insurance Co. in Toronto, says Co-operators’ portfolio funds account for about 95% of its 2007 fund sales.

TD Mutual Funds Inc. had the worst performance among seg fund families in 2007, with just 9% of AUM in above-average performing funds. Desjardins Financial Security, based in Montreal, was also very weak, with 19.9% of AUM in the top two quartiles. TD lost 6.7% in AUM in 2007, whereas Desjardins gained 8%.

The other companies that lost AUM were Winnipeg-based Great-West Life Assurance Co. , down 5.4% year-over-year, and Transamerica, down 1%. But both came into 2007 with weak performance numbers for 2006.

Most seg fund families feel they are positioned to do well in 2008 because their conservative approach tends to do well in volatile and/or weak markets.

AGF’s Hubbes expects the Primerica funds to continue to perform well this year. The funds have been underweighting energy for the past couple of years and have very few consumer discretionary holdings. They are overweighted in consumer staples, however, and have added some exposure to European banks, taking advantage of dropping prices.

The funds also have good exposure to precious metals and are slowly increasing foreign content, which is currently about 25% of the equity holdings. IE