During the RRSP campaign, I met one of my clients who held investments with Manulife for a while. During our meeting, he showed me his investment statements from the other company. He had invested in segregated funds for the past 10 years and wasn’t happy with the results. While I am not bashing Manulife (I still took it in my portfolio for our best 2010 stock picks contest 😉 ), I can’t say that I am a big fan of Segregated funds either!
Segregated funds (also called seg funds) are one of the strange beasts created by some crazy financial scientist in the labs of insurance companies. They are very similar to mutual funds when we look at their investment composites. If you look in your track investment apps you will see that there are seg funds for every kind of investor profile. However, when you call a life insurance investment services, they will explain the difference between segregated funds and mutual funds.
Segregated funds are held within a life insurance policy. This means that they are part of the policy paid to your beneficiaries if you decease.
Segregated funds usually come with a partial to full capital guarantee. The term to benefit from this guarantee is usually 10 years. After this period, your capital can be guaranteed at 75% to 100%.
As you can see, Seg funds are quite similar to mutual funds. However, there are some major cons of buying them.
Management ratios is one of the most important metrics you need to analyse when looking at an investment. If your fund has a 3% MERs, this means that you start January 1st of every year with a yield of -3%. It can be hard for a fund manager to overcome this obstacle.
You won’t be surprised that segregated funds have the highest MERs in the world funds. This can go from 0.25% to 1% more than a management fee on similar funds without the guarantee of capital.
When you think about it, most balanced mutual funds are showing positive results over a 10 year period. And rarely you will see a fund returning only 75% of their value after 10 years. However, if you are doing selective and highly speculative trades (like buying techno funds in 1999), your guarantee can be worth something today. But if you follow an established asset allocation, you would never need this kind of guarantee over 10 years.
You may think by buying an investment fund with MER fees 30% higher than others that you would be done with fees. Well, my friend, you may also end-up paying both front end and back end fees. While front end fees are usually waived by the advisor (who is looking for his commission after all 😉 ), the back end fees are usually in place (which guarantees the advisor a higher commission pay check at selling and trailer fees for at least 5 years. if you don’t want to pay fees to sell the fund).
As you can see by now, I don’t really like seg funds ;-). If you are really looking for capital security and still want to benefit from the market growth, I suggest you consider linked notes. You will still be paying a high price (in my opinion) for security but you will get a better return (if you take the time to buy the right one 😉 ).
Do you have seg funds in your portfolio? How are they doing? Do you like them?
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