Equities markets posted generally dreary returns last year, but sharp stock picking on the part of some segregated fund managers minimized the damage.
Good stock-picking “is really important in volatile and trendless markets,” says Bill Kyle, executive vice president, wealth management, in London, Ont., with Winnipeg-based Great-West Lifeco Inc.’s three insurance subsidiaries, Great-West Life Assurance Co., London Life In-surance Co. of London, Ont., and Toronto-based Canada Life Assurance Co.
These three seg fund families had the best investment performance in 2011, with 69%-73% of their long-term assets under management in funds in the first or second performance quartile.
When these firms reviewed their most successful mandates, Kyle says, they found “consistent value added by stock-picking — identifying good, solid companies that are reasonably priced.”
Kyle notes that these funds’ portfolio managers also didn’t shy away from investing in companies in problem-plagued Europe, unlike many of their peers. He suggests that avoiding European companies was an overreaction that brought the valuations of global franchises down. “Even in weak-performing sectors,” he says, “there are still strong-performing stocks. You have to identify opportunities and take advantage of them.”
Good stock-picking also was key in the turnaround at both Montreal-based Standard Life Assurance Co. of Canada and Empire Life Insurance Co. of Kingston, Ont., as was picking the rights regions or sectors.
For Standard Life, 67.5% of long-term seg fund AUM was in above-average performing funds in 2011, vs 32.4% in 2010 and 13.9% in 2009. Among the investment selections contributing to the 2011 returns, says Jay Aizanman, Standard Life’s vice president, client portfolio management, were Arc Resources Ltd., Vermillion Resources Ltd., BCE Inc., Telus Corp., Enbridge Inc., Boardwalk REIT and Brook-field Infrastructure Partners LP. Standard Life also was biased toward the U.S. in its asset-allocation products.
As for Empire Life, 60.8% of its long-term seg fund AUM was in top-performing funds last year, vs 27.4% in 2010 and 40.6% in 2009, says senior vice president and chief investment officer Gaelen Morphet, a value-style portfolio manager who came on board in late 2009. Empire Life’s seg funds were underweighted in materials and energy, which is typical of value managers. But, atypically, Empire’s portfolio managers also invested in gold stocks during various periods during the year, “which worked sporadically,” says Morphet. “But when it worked, it worked really well.”
At the other end of the performance scale, Quebec City-based Industrial Alliance Insurance & Financial Services Inc. had only 33.3% of its long-term seg fund AUM in above-average performing funds in 2011. The firm had trouble with both sector and securities allocation. “We didn’t have enough in defensive sectors,” says François Lalande, IA’s vice president for portfolio management. IA’s performance was also hurt by the weakness in small-cap equities.
Emerging-markets exposure was a problem for Toronto-based Transamerica Life Canada. This contributed to a drop in performance in 2011 to 44% of long-term seg fund AUM in funds in the top two performance quartiles, vs 68.1% in 2010. “We weren’t higher than market weight in our asset-allocation portfolios but were higher than some portfolio programs,” says Geraldo Ferreira, Transamerica’s vice president, investment products development and management, at Transamerica.
Emerging markets were sideswiped by the flight to the safety of U.S.-dollar investments last year, but Ferreira still thinks a good weighting in emerging markets is appropriate “because that’s where the opportunities for future growth are.”
Transamerica also was affected negatively by Transamerica Fidelity Canadian Asset Allocation Fund’s slippage to the third performance quartile last year from the first in 2010. This fund has a significant share of Transamerica’s fund family’s AUM and, says Ferreira, its foreign equities holdings and its growth bias were a drag on its relative performance.
Fixed-income investments performed a good deal better than equities investments in 2011, and this was reflected positively at IA. “One of the few bright spots [at IA] was fixed-income,” says Lalande. “We expected rates to remain low and so had a longer [average] duration than most of our peers.”
Two of Transamerica’s income- focused funds did exceptionally well: Transamerica Canadian Bond GIF and Transamerica Canadian Fixed Pay GIF, whose returns beat most of their competitors.
However, Empire’s portfolio managers took a different view to fixed-income, which offset somewhat excellent equities performance. “The team felt that recovery in the U.S. would be stronger and interest rates would rise,” says Morphet, who adds that the firm’s portfolio managers have increased the average duration of their fixed-income portfolios and will be adding more fixed-income expertise.
In addition to market-related factors, investment processes and restructuring also helped the top-performing seg fund families.
“We actively manage our product shelf,” says GWL’s Kyle, “and are very careful to make sure that managers stick to their investment style — that we get the investment style we hired them for.”
In addition, the portfolio managers at GWL’s three insurance subsidiaries, who focus on preserving capital while using stock-picking to enhance returns, have been combined into one large investment-management firm, GLC Asset Management Group Ltd., to enhance growth potential. A portfolio solutions group has been created to manage all asset-allocation products.
There are three separate investment teams within GLC, each with its own investment style and processes: Great-West Investment Management uses a top down, growth-oriented, all-cap approach based on broad economic trends; London Capital Management uses a “growth at a reasonable price” approach to enhance the risk/reward metrics; and Laketon Investment Management focuses more on large-caps, utilizing, as Kyle puts it, “unique growth and value expertise.”
Standard Life has also done some internal restructuring, says Aizanman: “We have promoted three up-and-coming professionals to portfolio managers. This results in an environment [in which] more questions are asked and there’s more discussion before decisions are made on including investments in our portfolios. We have also introduced more challenging internal reviews to tighten up the equities decision-making process and have broadened out our mandates to include some foreign content.” IE