News from The Globe and Mail
Seg funds expensive security
Saturday, August 03, 2002
Market veterans say there are two emotions that drive the markets: fear and greed. We saw what greed can do when the markets peaked two years ago. Now fear has taken the wheel.
Battle-weary investors are flocking to the security of bonds and income funds, which makes sense for some. What doesn't add up is the security overkill that comes from segregated funds. If your will is in order and your life insurance needs are met, there are plenty of safe investments with potential.
Segregated funds are often described as a mutual fund wrapped in a life insurance policy. They are considered life insurance products because the monies held in the fund must be kept separate from the other assets of the insurance company. The bulk of the principal is guaranteed to the investor.
They are popular with small-business owners because they are creditor proof, meaning the beneficiaries are protected from creditors if you declare bankruptcy. Segregated funds are also exempt from probate fees and most are eligible for registered retirement savings plans. You pay for all that security with high management fees.
Since they were first introduced in the 1980s, the number of segregated funds available on the market has skyrocketed to more than 1,730. The best performer over the past 10 years has been the Empire Equity Growth Fund with a 13-per-cent annual return. It has a modest management expense ratio (MER) of 1.32 per cent, plus a back-end load when you cash out.
The worst performer over the same period is the Trans IMS Canadian Growth Fund, which has lost just under 1 per cent a year. It has a hefty MER of 2.6 per cent and a back-end load to boot. Aside from this dog of dogs, not a single segregated fund lost money over the past 10 years. In many cases, the poor returns can be directly attributed to high management fees.
Segregated funds cover the spectrum of asset classes, which makes the logic behind the funds even more baffling. Believe it or not, there are 76 segregated money market funds available. Who needs to pay extra for a return guarantee on short-term government debt?
There are 121 segregated bond funds on the market. The best performer over the past 10 years is the Batirente-Section Obligations Fund with an annual return of 8.44 per cent and the MER is 1.65 percent. The worst performer is Vistafund 2 Bond with an annual return of 5.3 per cent and an MER of 2.38 per cent plus a back-end load. If you had put that cash in high-quality government bonds and saved the management fee, you would have outperformed the average segregated bond fund.
The most compelling argument for staying away from segregated funds is market timing. From this point in time, the likelihood of your investment making money is far greater than the possibility of losing money. The evidence that we are at or near the bottom of a cycle is overwhelming. Paying extra to ensure a return on your principle over the next 10 years is a high price to pay for security.
Dale Jackson is creator and producer of Report on Business Television's weekly interactive Talking Mutual Funds with Ranga Chand.
This column first appeared on GlobeinvestorGOLD.com. For more exclusive analysis, please see the Web site.
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