With global stock markets taking a steep plunge last year, the performance of most segregated fund families was nothing to crow about.

However, those seg fund families that adopted defensive investment stances tended to outperform those that did not.

But that doesn’t mean overall performance was good. Most funds had negative returns — doing well in 2008 meant only that the fund family lost less than average.

Among the defensive-minded but better performing seg fund families were those of Toronto-based CI Investments Inc., Industrial Alliance & Financial Services Inc. of Quebec City and Montreal-based Standard Life Assurance Co. of Canada, according to Morningstar Canada data. Company executives say their firms will do well in 2009 as they take cautious advantage of opportunities.

Topping the performance list was Mississauga, Ont.-based Primerica Financial Services Ltd., with 82.6% of its seg fund assets under management in the first or second performance quartile for the year ended Dec. 31, 2008. Primerica has led the performance parade for the previous four years, with 100% of its long-term AUM in the top two quartiles.

Three other seg fund families had 70% or more of their long-term AUM in the top two quartiles — Mackenzie Financial Corp. of Toronto (77.2%), Industrial Alliance (72.8%) and London, Ont.-based London Life Insurance Co. (72.5%).

CI and Standard Life had 59.2% and 57.8%, respectively, of long-term AUM in the top two quartiles.

At the bottom of the heap was Toronto-based TD Mutual Funds Inc., with 0.3%. Kingston, Ont.-based Empire Life Insurance Co. also had a tough year, with 4.6% of its long-term AUM in the top two quartiles — a big drop from the 71.3% it posted in 2007.

Martin Hubbes, chief investment officer with Toronto-based AGF Funds Inc. and manager of the Primerica funds, says the reason for Primerica’s consistent outperformance is twofold: in 2004-07, the equities portion of the funds, which mirror AGF Canadian Stock Fund, did well; in 2008, the zero-coupon government bond portions of the portfolio that finance the seg fund guarantees offset poor returns for the equities.

The composition of benchmarks had an impact, in some cases. For example, a number of the big funds at Manulife Financial Corp. in Waterloo, Ont., had higher exposure to equities than average for their peer groups — and 2008 was very bad for equities. Manulife had only 28% of its AUM in the top two quartiles, vs 57% in 2007.

Performance of outside managers also played a role. Manulife’s lineup includes funds managed by CI and Fidelity Investments Canada ULC. CI funds generally did well in 2008, although CI Harbour Growth & Income Fund, in which one of Manulife’s big seg funds invests, was a fourth-quartile performer. Fidelity itself did not do well, with just 36.2% of its long-term AUM in outperforming funds.

An example of a defensive strategy that worked is the one employed by CI. Although CI Harbour Growth & Income Fund was one of the few CI funds that did poorly in 2008, CI Harbour Fund was a first-quartile performer.

CI Harbour Fund was “high cash until the autumn” and was underweighted in financials, says Derek Green, CI’s president and national sales manager. Green notes that the fund still has cash that it can deploy if managers see opportunities: “All its fixed-income is in cash, and when the market comes back, it will participate.”

And CI’s Signature series funds and its Portfolio funds outperformed, says Green. Signature series funds were underweighted in energy stocks, very defensive in the fall and are still quite defensive. They have some investment-grade and high-yield bonds, which are expected to appreciate as spreads between corporates and government bonds fall. The Portfolio funds, which tend to be used by conservative investors, are “pretty conservative and the managers don’t make big bets.” This is an approach that tends to lead to outperformance in poor markets because it minimizes risk.

Meanwhile, Empire is sticking to its long-term approach and isn’t worried about periodic down years. Deborah Frame, Empire’s senior vice president and chief investment officer, says that even though the company knew that equities could be badly hit, it didn’t sell the investments that its managers believe have good long-term prospects.

One example is Canadian Oil Sands Trust. Currently, demand for oil is falling faster than supply — but that won’t last. And once demand starts climbing again, supply will be lower to respond, says Frame, pushing up prices.

@page_break@Another factor for Empire in 2008 was the drop in gold prices and the climb of gold stocks. Empire had decided in 2006 to get out of Canadian gold stocks and buy gold exchange-traded funds because the high value of the Canadian dollar was squeezing gold companies’ margins. Empire stuck with that strategy through the fourth quarter of 2008, despite the drop in the C$ vs the U.S. dollar, says Frame, because its fund managers felt that the US$ appreciation was an unreasonable and temporary phenomenon.

Manulife is also not worried about a down year. Most of its big seg funds that had below-average performance in 2008 are first-quartile performers over five years, which is a better gauge of long-term performance, says Michael Ondercin, Manulife’s assistant vice president, segregated fund products.

Toronto-based TransAmerica Life Canadahad a similar experience to Manulife’s, with four big funds slipping to underperformance, says Geraldo Ferreira, vice president of investment products development and management for AEGON Fund Management Inc. and TransAmerica in Toronto. He considers the 2008 performance an anomaly, pointing out that TransAmerica funds had above-average performance in four of the past six years.

The biggest reason for Trans-America’s underperformance was its fixed-income investments. The managers at AEGON invest in corporate bonds and didn’t change this approach in 2008 — and it’s one that will likely serve them well when bond prices increase as spreads fall.

In contrast, François Lalande, vice president, portfolio management, at Industrial Alliance, credits its funds’ performance on the fixed-income side for its strong showing in 2008: “Our bond managers are excellent to exceptional.”

In 2008, some fund managers were neutral on corporate bonds but kept these holdings to short durations, while others were underweighted in corporates, overweighted in government bonds and, thus, sheltered from the impact of the credit crisis. They were also underweighted in long governments, which didn’t do as well as the short- and mid-term durations last year. IE