Take care with segregated funds

There are a number of changes taking place in the world of segregated funds, and most are not good news for investors. 

Securities regulators now require insurance companies, who sponsor these funds, to raise their capital reserves in some cases. This is to ensure adequate money to meet the guarantees of principal, should that become necessary in the future.

One of the main attractions of segregated funds is the death and maturity benefits. These protect your investment in the event of a stock market crash. In some cases, the guarantee is 75 per cent of the principal. In others it is 100 per cent.

To make their products more attractive to the public, some companies have introduced very aggressive segregated or seg funds, such as NASDAQ index funds. Obviously, the risk of potential loss is higher than with a more conventional blue-chip equity funds. That, plus the 100 per cent guarantees, is making regulators nervous.

Companies raise fees
In response to the new requirements, some companies have already withdrawn their seg fund lines from public sale. For example, the complete line-up of 18 Trimark seg funds was terminated at t end of December.

Other companies are raising the management expense ratio fees (MERs) on their seg funds. Or they’re reducing the guarantees from 100 per cent to 75 per cent.

So if you’re considering investing in a seg fund, find out the current situation beforehand. A potential increase in the MER should be of special concern. Because once you’ve made the investment, there is nothing you can do to protect yourself against escalating costs, unless you’re willing to bail out and forfeit the guarantee.

Ask your advisor if the insurance company sponsoring the fund has made any move recently to increase the charges, or if one is contemplated soon as a result of the new regulations. The more information you have, the better informed your decision will be.

From the February 2001 issue of Mutual Funds Update, a monthly newsletter edited and published by Gordon Pape. For a free three-month trial subscription, go to http://gordonpape.fifty-plus.net/freeMFU.html