Insight March 2003 Monthly Update

“This issue of Insight updates our ongoing coverage of the segregated funds market. Our data gathering now covers 19 insurers who account for 92% of all retail segregated fund assets. The overall message is that segregated funds have not escaped the bear market mauling that has clobbered the rest of the investment funds industry. In relative terms, they have held up better than their mutual fund cousins. Still, segregated funds must be viewed in the context of the broader landscape of the overall investment funds industry, and their emerging growth experience is highly reflective of its key trends. In this connection, the severe sales slowdown, the shift toward solutions and away from stand-alone fund product, fierce competition both from within and outside of the industry, and innovative product design including more flexible pricing and compensation are all overarching trends that are mirrored in the segregated funds market. On the other hand, segregated fund providers continue to face challenges unique to this product arena: the continued impact of the introduction of mandatory capital reserve requirements, the ensuing increased cost of offering guarantees, and the harmonization of sales rules with mutual funds. Throughout this article we report on how these aspects are influencing management expense ratios, the use of segregated fund wraps, and the segregated fund asset mix. Confronting this combination of a challenging external environment and demanding internal factors, segregated fund manufacturers responded swiftly with increased activity on many fronts, ending 2002 with $2.1 billion—or 5.2% of beginning assets—in net new money flowing into the industry (see Figure 1). This number is an impressive 32% above the 2001 levels, but well below the 1997-2000 levels when segregated funds came to the fore as a mainstream investment vehicle.”