Understanding investments, your way GROUP RETIREMENT SAVINGS If you re not a financial expert, choosing your investments can sometimes be confusing. Here is some basic information on investment types and different management styles and strategies.
Understanding investments, your way Deciding where to invest is one of the most important steps on the road to retirement. But knowing what type of investment is right for you is not always easy. Here are the various investment options available under your group retirement savings program. 1. Guaranteed funds 2. Market related (or variable return) funds 1 Guaranteed funds Earn a set rate of interest and give you a guarantee to receive the interest plus the money you invested at the end of the specified period. It is important to know that when a guaranteed fund is cashed prior to the end of the specified period, a market value adjustment (MVA) may occur. This adjustment can be positive, negative or neutral depending on how the current interest rate compares to the rate of the guaranteed fund. 2 Market related funds Invest in a variety of securities with different risk levels, depending on the specific investment objectives. The capital (and the investment return), are not guaranteed. Some key market related fund categories are: Fixed Income Funds Balanced/Diversified Funds Equity Funds 2
Fixed Income funds invest in securities that provide fixed periodic payments, mainly in the form of interest. This includes money market securities, mortgages and bonds. Fixed income funds are usually less risky than equity funds although they also usually provide lower returns on the long term. Balanced funds, also known as diversified funds consist of a combination of money market securities, bonds and equities. The weighting of each component depends on market conditions and on the objective of the fund. The asset mix can go from conservative (high proportion of bonds and money market securities) to aggressive (high proportion of equities). Equity funds are mainly made up of common shares and can be categorized according to company size (small, mid or large capitalisation), the investment style of the holdings (value, growth, growth at a reasonable price or core) in the portfolio, geography (securities in which the fund invests can be from one country, or from many countries) or industrial sector (natural resources, technology, pharmaceutical, mining, etc). Under your group retirement savings plan, market related funds can be invested in the following types of securities: Money Market Mortgages Bonds Real Estate Investment Trusts Equities Money Market: These funds consist of a wide range of short-term instruments such as certificates of deposit, banker s acceptance and federal and provincial Treasury bills. Money market securities are generally considered to be safe and liquid investments. Mortgages: These are part of the fixed income investment family with bonds and money market securities. The investor-lender receives fixed interest. Unlike bonds, the interest rate is set solely for the interim term of the mortgage. When each term expires, the interest rate is revised. In addition to the interest paid, a portion of the capital that was lent is repaid monthly. Bonds: These are debt instruments issued by a government or a corporation (the issuer ) that needs capital. The issuer agrees to pay back your money at the end of a preset term. Bonds also generate interest income, which is usually payable every six months. Bonds may be sold before their maturity date. The value will vary based on the interest rate at the time compared with other bonds with similar terms. When interest rates rise, the price of bonds fall and, when interest rates fall, the price of bonds rise. Real Estate Investment Trusts: One of the most convenient ways to invest in real estate is to acquire shares of Real Estate Investment Trusts (REIT). REIT is a corporation or trust that uses the pooled capital of many investors to invest directly in real estate, either through properties or mortgages. REITs enable sharing in residential and non residential properties such as hotels, malls, and other commercial or industrial properties. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. Equities: These are shares of ownership in a company. As a shareholder of the company you are entitled to a part of the company s assets and profits. The company s profits may be paid to the shareholders in the form of periodic dividends or completely reinvested back into the company. 3
More about market related funds The market related funds available under your group retirement savings program are known as pooled funds. Pooled funds are made up of money that is pooled together by investors (like you) to make a group investment. A fund manager is the individual or group of individuals responsible for managing and supervising the investment fund. The fund manager with his team of analysts decides when and what to buy or sell. The fund manager s decisions are usually based on extensive research and are made in accordance with the fund s investment objectives. The asset value of the fund fluctuates based on the market value of the securities held, the capital gains and losses, and the dividends and interest received. The value of the investment held by you in the fund, therefore, fluctuates. To successfully identify and select securities with good return potential, measure investment risk, and understand economic cycles and their impact on company performance, you need in-depth knowledge and investment tracking experience. When you buy investment funds, you are buying the expertise and service of the group of professionals who manage those funds. By letting professionals manage your investments, you benefit from their expertise and knowledge of the economy, the financial markets and the companies in their analysis sector that would otherwise not have been available to you. 4
i Monthly fund sheets are available for each of the investment funds offered under your group retirement savings program. These fund sheets provide information on the nature, performance and objective of each fund and fund manager. Consult the Participant Services secure website for information about the funds available under your company s group retirement savings program. Management Strategies and Styles PASSIVE MANAGEMENT Managers attempt to replicate the return and risk profile of an index. When following this strategy, the manager takes no active decision regarding security selection. Fixed income funds as well as equity funds can be passively managed. This strategy is also known as index-investing. ACTIVE MANAGEMENT Managers attempt to outperform the index by taking active decision with regards to stock selection and/or sector and regional allocation. The return of an actively managed fund depends on the skill of the manager and its research team. Funds can be actively managed according to different styles: VALUE The fund manager buys companies whose stocks are trading below their intrinsic value, but whose true worth they believe will eventually be recognized. Value-style investing tends to be less aggressive than growth-style investing. GROWTH The fund manager invests primarily in companies with above-average profits or earnings growth, generally companies with strong competitive positions or expanding market opportunities. Growth-style investing tends to outperform value-style investing during bull market periods and tends to underperform value-style investing during market downturns. GARP (Growth at a reasonable price) This is a hybrid style that combines growth and value. Managers favour growth stocks that trade at a reasonable price. CORE The fund manager seeks to exploit opportunities without following any particular style. Core-style investing is very similar to GARP-style investing. The difference is that a core portfolio will usually include both growth and value companies while a GARP portfolio will hold growth companies that trade at a discount relative to their intrinsic value. i Combining growth and value funds can be beneficial as they usually don t move in tandem. By combining both value- and growth-oriented investments, you can better diversify your portfolio and possibly reduce the impact of fluctuating returns. 5
Don t be influenced by past returns When it comes to choosing investments, investors very often look at only one thing past returns. However, a fund s past performance is not a guarantee of its future performance. The best approach is to make your investment choice based on your risk tolerance. Risk tolerance is your ability or willingness to accept variation in the value of your investments. Risk tolerance will usually depend on your objectives, your age and how much time you have left until you retire. If you are less than five years from retirement, major fluctuations in the value of your investments will have a direct impact on your retirement income. You should probably favour safer instruments like fixed income funds. i Consider the period of time during which your group retirement savings can accumulate before you need them. The more time you have to smooth out the ups and downs of the market, the more risk you may be willing to take. However, if you expect to keep working for another 15 or 20 years, short-term fluctuations in the value of your investments will have less impact on your retirement income. You could invest a higher proportion of your savings in equity funds. Here s a chart that shows the relationship between risk versus return. Lower risk / Lower return Balanced / Diversified Funds Fixed Income / Bond Funds Guaranteed Investments Money Market Higher risk / Higher return Foreign Funds Canadian Equity Funds Note: Specialty funds are not shown on this chart as their risk and return can vary depending on their fund composition and strategies. 6
Smooth out the bumps in the road Since risk is partly related to the type of investment, you can reduce it by allocating your assets among various investment funds. The first step to diversification is to establish your asset allocation. Asset allocation is the most important investment decision you will have to make. It is estimated that the types of asset classes and the proportion they represent within a portfolio explain on average more than 90% of the portfolio s variability of returns over time.* In order to smooth out your portfolio performance it is recommended that you maintain a good balance of equities, bonds and money market securities. While the equity component tends to outperform the bond component during healthy economic periods, bonds and money market funds are known as being more defensive and likely to do better than Equity Funds during market downturns. Diversifying your investments within each asset classes is also recommended since it is impossible to predict which geographic regions, companies type or management styles are going to do well. By combining different asset classes, maturity dates, management styles and geographical areas your portfolio will be protected against an asset s specific risk. If all these asset allocation decisions are a headache for you, a good solution may be to invest in a lifecycle portfolio corresponding to your investor profile. By investing in an asset allocation portfolio you can be assured of a rigorous follow-up by our managers and not lose any sleep in the process. i Now that you know more about investments, remember to review your investment portfolio at least once a year to be sure that you re on target to your retirement, your way. * According to Gary P. Brinson, L. Randolph Hood & Gilbert L. Beebower study entitled Determinants of Portfolio Performance published by the Financial Analyst Journal, July/August 1986, pp. 39-44. Gary P. Brinson, L. Randolph Hood & Gilbert L. Beebower study entitled Determinants of Portfolio Performance II: An Update published by the Financial Analyst Journal, May/June 1991, pp. 40-48. 7
About Desjardins Insurance Desjardins Insurance has been offering a wide range of life and health insurance and retirement savings products to individuals, groups and businesses for more than a century. As one of Canada s five largest life insurers, they oversee the financial security of over five million Canadians from offices across the country. Desjardins Insurance is part of Desjardins Group, the country s leading cooperative financial group. GROUP RETIREMENT SAVINGS Questions? Contact us! Telephone: 1-800-968-3587 8 a.m. 8 p.m. EST, Monday to Friday Email: grouppension@dfs.ca Desjardins Insurance refers to Desjardins Financial Security Life Assurance Company. 100% This document is printed on Rolland Enviro paper. 10250E09 (15-12)