Supermodels are getting fatter, movie box office sales are up 17.5% over last year, and lipstick has its own index. With no end in sight to the bear market, escapism appears to be trumping pragmatism.

Investors are no exception. The reality of a market correction that has seen many lose 25% or more over the last 12 months has them turning their backs on riskier assets and looking for new, secure — and often pricier — places to stash their cash.

“People are feeling vulnerable. It’s the same reason they’re flocking to the movies to see superhero flicks,” said Matthew Harvey, BSc., CFP and CLU, and the owner of Harvey Financial Solutions in Kincardine, Ontario. “When times are good and markets are up, people are feeling strong, if not invincible. But investor sentiment is down, net worth is down and they’re looking for any kind of guarantees they can get.”

The latest research by Investor Economics shows that cash and cash-equivalent holdings — ranging from conventional and high interest savings accounts to money market funds and GICs — totalled slightly over $1 trillion at the end of 2008. This amount represented 46% of household financial wealth and an increase of approximately $125 billion from a year earlier.

But more than just seeking fixed return rates, the current economic climate has shown that when risk rears its ugly head, investors are willing to pay a premium to have their investments insured.

Segregated funds — typically targeted toward the investor who is close to retirement, or recently retired — are experiencing a renaissance. Manulife Financial’s seg fund sales, for example, were up a record 10% in the final quarter of 2008 and 18% for the year overall.

With a guarantee on the principal and the inclusion of a death benefit, seg funds are generally regarded as a smart and appealing product for the mature investor.

“The five years before and the five years after retirement is really critical in terms of how people invest,” Harvey said. “If you get caught with your pants down when you have everything invested in the markets and all of a sudden there’s a correction, it can hurt.”

Because of the insurance element, seg funds are slightly more costly to manage and tend to offer marginally lower return rates than straight mutual funds. Still, they’ve garnered interest among young people looking for risk mitigation in the current economic climate.

“Normally people under 50 are interested in getting the greatest return for their investments,” said Harvey. “In the short term, and with the markets the way they are now, segregated funds look great on paper. But they don’t understand that the biggest weapon we have against the stock market is time. The more time you have, the more risk you can take.”

At Sun Life Financial, seg fund sales in Canada increased by 58% in the fourth quarter of 2008 over the previous year and by 44% for the full year 2008 over 2007.

“It comes down to the individual, to the type of product and protection you want,” said Rocco Taglioni, vice-president of individual wealth at Sun Life Financial Canada. “In some ways, you could say a young person could be best served by putting money into a mutual fund. But for that person who is worried about securities, they may be best served by putting their money into a segregated fund.”

At CI Investments, seg fund sales have grown significantly over the past two years. Gross sales of seg funds were up 30% and net sales up 70% in 2008 over the previous year. Proportionally, they also account for an increasing share of CI’s overall gross and net sales.

The trend became more pronounced in the first two and half months of 2009, when seg funds accounted for approximately 180% of CI’s net sales. It’s a remarkable number, even after taking into account a large institutional redemption from one of CI’s mutual funds in January.

Seg funds at CI now account for a greater proportion of net sales than of gross sales. Partly this is attributed to the 10-year maturity periods associated with seg funds. But the introduction of SunWise Elite Plus from CI’s partner Sun Life Financial, has also proven a catalyst for new sales.

Following on the success of its competitor, Manulife, which introduced its Income Plus in 2006, SunWise Elite Plus includes a guaranteed minimum withdrawal benefit on maturity.

“With SunWise Elite Plus, the product, itself, really speaks to a specific market need,” said Taglioni at Sun Life. “For individuals looking for some downside risk protection, they get that with this product.”

Indeed, the vulnerability that has seen superheroes and lipstick garner greater symbolic importance in the general public has pushed a generation that has never seen the downside of risk until now to find security where they can.

“When the economy is bad, people tend to be exposed,” said Harvey. “My life insurance volumes have never been so high.”

(03/27/09)