With volatility the name of the game in securities markets last year, the timing of purchases and sales of securities was a critical factor in how many families of segregated funds performed. But there were other factors affecting seg fund family performance, including the weighting of corporate bonds and underperformance by many “quality” stocks.

Toronto-based TD Asset Man-agement Inc., manager of TD Mutual Funds, led the performance parade among the families of seg funds, in large measure because of its expertise in fixed-income investments, including corporate bonds.

According to figures from Morningstar Canada, TD had 90.6% of its long-term seg fund assets under management in the first or second performance quartiles in 2009, a big turnaround from 2008, when just 0.3% was in the top two quartiles. The firm bought corporate bonds in 2009, when spreads were high compared with those of government bonds; the gains earned as the spread narrowed, combined with good equities returns, produced the top-notch results.

The timing issue is best illustrated by the contrasting results from Industrial Alliance Investment Management Inc. of Quebec City and Montreal-based Standard Life Assurance Co. of Canada.

IA started buying equities in February 2009, and ended the year with 64.4% of its long-term seg fund AUM in funds in the first or second quartiles.

“We could see a change in direction last February,” says François Lalande, vice president of portfolio management at IA. “We take a top-down approach and look for turning points.”

However, Standard Life waited until well into March to start buying equities, and only 13.9% of its long-term seg fund AUM was in the first or second quartiles — vs 57.9% in 2008 and 97.2%. in 2007.

“Much of the equities gains came in late February and early March, before it was clear that the U.S. rescue plan would work,” says Jay Aizanman, vice president, national accounts, marketing and distribution, with Standard Life. “We could see that valuations were low, but we focus on risk — and we felt there was too much risk.”

Toronto-based Transamerica Life Canada also had good fixed-income returns following weak results in 2008.

“Our team has a bias to corporate bonds, and they had great results last year,” says Geraldo Ferreira, vice president for investment products development and management at both Transamerica and AEGON Fund Management Inc. of Toronto.

Biases can, of course, have their downsides; and Ferreira says that the corporate bond bias was responsible for the poor returns for the fund family in 2008. Transamerica had 62.6% of its long-term seg fund AUM in the first or second quartiles in 2009, vs 23.1% in 2008 and 62.4% in 2007.

A top-performing fund for Trans-america, Transamerica i-maxx Canadian Fixed Pay Class 2 Fund, had the fifth-highest return among the 1,001 balanced seg funds in Canada, which Ferreira puts down to its financial services equities bias, its energy exposure and the good performance in corporate bonds. He also notes currency hedging vs both the U.S. dollar and the euro had helped Transamerica’s foreign equities funds.

In addition to the timing of equities purchases, the lagging performance of quality equities was a factor that dragged down returns — for Standard Life in particular, says Aizanman, who notes that a lot of gains were in the shares of companies that had been punished in 2008 because of their high level of risk. Standard Life sticks with quality companies, such as large-cap firms with good balance sheets and leadership positions in their industries.

Many experts think 2010 will be a year in which quality companies outperform, which would be good news for Standard Life and several other seg fund companies.

For instance, Toronto-based AGF Investments Inc., which manages funds for Mississauga, Ont.-based Primerica Financial Services (Canada) Ltd. , didn’t like the risk in a lot of the stocks that did well last year and stuck with a conservative approach. “We believe the market will return to paying for real earnings,” says Martin Hubbes, AGF’s executive vice president and chief investment officer.

The result was that just 3.1% of Primerica’s long-term seg fund AUM was in the first and second quartiles in 2009, vs 82.6% in 2008 and 100% in 2007. The six Primerica Asset Builder funds have different maturity dates, which affect the equities/fixed-income mix, but are otherwise managed in very similar fashion. As a result, the funds’ performance tends to be similar.

@page_break@However, it’s important to note that underperformance doesn’t necessarily spell poor sales.

“Last year was one of the company’s best years for gross sales,” says Michel Fortin, Standard Life’s vice president for marketing and sales development. He credits the fact that Standard Life “didn’t have to change any mandates, management expense ratios or the guarantees offered.”

And, unlike some insurers, Stan-dard Life did not have to turn to the capital markets last year to raise money, which reassured unitholders about its solvency. Aizanman adds that even with a lagging performance, many Standard Life seg fund unitholders were able to reset their guarantees 20% higher at the end of 2009.

Although strong performance can boost sales, so can new products. It was the introduction of a guaranteed minimum withdrawal benefit product that particularly fuelled sales at Lévis, Que.-based Desjardins Financial Security, almost tripling its AUM as of December 2009 vs a year earlier, says Alain Bédard, senior vice president, individual insurance and savings, with Desjardins in Montreal. He notes that sales took off following the introduction of these products in November 2008.

Manulife Financial Corp. of Waterloo, Ont., and Toronto-based CI Investments Inc. were the other big seg fund families (in addition to IA) with long-term AUM of $10 billion or more to have good results in 2009. For example, 81.7% of Manulife’s long-term seg fund AUM was in the first or second quartiles vs 28% in 2008 and 57% in 2007.

(London Life Insurance Co. of London, Ont., brought up the rear among the big firms, with just 37.9% of its long-term seg fund AUM in the top two quartiles.)

By the end of 2009, Manulife had overtaken London Life as the biggest seg fund family, with $22.7 billion in long-term AUM vs London Life’s $21.8 billion. Since Dec. 31, 2006, Manulife’s AUM has increased by 37.8%, vs just 3.9% for London Life. In 2009, Manulife had $2 billion in net sales, as well as almost $5 billion in market appreciation.

Michael Ondercin, Manulife’s assistant vice president for seg funds in Waterloo, says there has been ongoing improvement in the firm’s investment-management process over the past few years.

“This has had a lot to do with manager selection and ongoing reviews of the funds,” he says.

Ondercin is particularly proud of the performance of the firm’s Simplicity portfolio funds. These were first introduced in January 2005 and now have $4 billion in AUM. In 2009, 92.8% of AUM in these funds were in the first or second quartiles.

He adds that the depth and breadth of the Manulife funds provides the basis for such portfolio families and also provides investors with the opportunity to build their own portfolios within the Manulife seg fund family.

At CI, two factors contributed to its 2009 success. One was the freedom and flexibility given to the fund managers within their mandates, which allow them to act quickly when market conditions change. The other was a company focus to give unitholders smooth returns by staying away from geographical and sector-specific funds and not chasing the next big thing.

CI’s performance has been solid, with 59%-64% of long-term AUM in the first and second quartiles in each of the past three calendar years. CI’s average AUM in the top two quartiles over the three years was 61.8%, which slightly beat out IA’s more volatile — although still good — average of 60.7%. CI’s three-year average was also significantly better than Manulife’s even more volatile 55.6%. IE