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Mutual Fund News

Sun Life boosts insurance fees on some segregated funds

FUNDS REPORTER

Sun Life Financial Inc. SLF-T has revamped its segregated-fund lineup by boosting fees and eliminating offerings because of the rising costs for money-back and other guarantees.

Segregated funds are like mutual funds except they charge higher fees to cover the cost of insuring a guaranteed return of money invested for 10 years, or on the death of the holder, and optional benefits.

Starting July 31, Sun Life will raise insurance fees on nearly all funds by up to 30 basis points and on the guaranteed minimum withdrawal benefit rider fee on its SunWise Elite Plus product by up to 30 basis points. (A basis point is 1/100th of a percentage point.)

The underlying funds are managed by its partner, CI Investments Inc.

"The world has changed since these products were developed and priced," Dean Connor, president of Sun Life Financial Canada, said yesterday. "We are in a new world where volatility [of stock markets] is higher."

The driver for the rising insurance fees stems from costs to hedge the "equity and interest-rate exposure behind our segregated funds," Mr. Connor said in an interview. "The cost of those hedges has gone up significantly and we think they are going to stay pretty high."

Like other insurers, Toronto-based Sun Life Financial has also been putting aside more capital in the past three quarters to build up reserves to protect against any shortfall when it needs to payback investors.

Mr. Connor expects investors will still be attracted to Sun Life's segregated-fund offerings despite higher fees. "We have seen a lot of interest in our segregated funds in the past 18 months," he said, adding that some investors want "peace of mind" during the market turmoil.

Among Sun Life's discontinued options is the Class A units of its SunWise Elite product that offers a 100-per-cent guarantee of money invested upon maturity and upon death. (Clients who currently have preauthorized chequing plans or systematic transfer plan for this product can continue with this option.)

However, Sun Life still offers the class B units that offer a 75-per-cent money-back guarantee at maturity, plus 100 per cent upon death, and class C units with their 75-per-cent guarantee of money invested plus 75 per cent upon death.

The condition is that new purchases of a portfolio of segregated funds now require that at least 30 per cent of the value be allocated to fixed-income investments.

Independent fund analyst Dan Hallett said he is generally not a fan of segregated funds because of the high fees that eat away at returns compared with mutual funds. But he said holding these investments can be beneficial in offering protection from their seizure by creditors subject to certain conditions.

For investors jittery about market downturns, "you can cover that off by putting together a portfolio that is diversified ... and build in that protection with bonds or different ways," Mr. Hallett said.

Research indicates that investors often invest in more aggressive equity funds when they buy segregated products because they provide those guarantees, he added.

***

Fee example

SunWise Elite CI Portfolio Series

Conservative Balanced Fund

Class B units (principal guarantee of 75% at maturity, 100% at death)

At Dec. 31, 2008 After July 31, 2009 (est.)
Management fee2.102.10
Other expenses0.180.18
Insurance fee0.250.50
GST0.120.13
Total MER2.652.91

© 2007 The Globe and Mail. All rights reserved.

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