Enhancements to MFS LifePlan Target Date and Target Risk funds

January 13, 2014

Plan sponsors may wish to consider whether this investment news has any implications for the investment options available within their plans. Sun Life Assurance Company of Canada purchases units of the funds listed below, which are established as segregated funds in accordance with the Insurance Companies Act (Canada).

MFS Investment Management (MFS) is making enhancements to the MFS LifePlan Target Date and Target Risk funds effective January 15, 2014.

While the focus remains on building a set of portfolios with risk exposures consistent with investor expectations, MFS has leveraged the expertise of its Quantitative Solutions team -in conjunction with their risk management tools- to enhance the legacy McLean Budden LifePlan Target Date and Target Risk funds.  

Rationale for the changes:

The following three principles drove the re-design of the MFS LifePlan funds:

  1. The balance between the competing investor objectives of i) growing assets during their working life and ii) protecting those assets as retirement approaches should dictate the shape and steepness of the glidepath instead of assumptions around "typical" investor behaviour.
  2. Using a set of strategic asset allocation portfolios with distinct risk/reward profiles as a building block helps to ensure that the funds' performance is consistent with their design, and investors' expectations.
  3. MFS adds value through active management of their proprietary underlying investment strategies which they believe provide for better risk transparency and a uniform investment philosophy.

Summary of significant changes:  

  • Glidepath redesign: The enhanced funds will feature a steeper glidepath than the current LifePlan Target Date funds which will be based on a capital markets approach, meaning a higher equity weighting than current funds in the early years of the funds and a lower equity weighting than the current funds for the years closer to the end date of the fund. As part of the re-design, MFS stress-tested the impact of notable market events on portfolios with a range of risk profiles, particularly at or near expected retirement date.
  • Equity diversification: The enhanced funds will feature increased diversification by both geography and style.
  • Domestic equity bias: The funds will have reduced exposure to Canadian equities as a proportion of total equity exposure.
  • Fixed income diversification: The funds will have an increased diversification by geography and interest rate sensitivity.
  • Specialty asset classes: The funds will feature a new asset classes such as global real estate.
  • Portfolio management: The MFS Quantitative Solutions team will manage the funds.

The tables below illustrate the current vs. new target allocations for the LifePlan funds.

MFS LifePlan Target Date - Target Asset Class Allocations

Current Target Allocations

Retiree

2015

2020

2025

2030

2035

2040

2045

2050

Canadian Equities (1 fund)

18

19

24

27

30

33

36

39

42

Global Equities (1 fund)

18

19

24

27

30

33

36

39

42

Canadian Bonds (1 fund)

55

52

44

39

34

29

24

19

14

Cash (1 fund)

10

9

8

7

6

5

4

3

2

Total

100

100

100

100

100

100

100

100

100

                   
New Target Allocations

Retiree

2015

2020

2025

2030

2035

2040

2045

2050

Canadian Equities (3 funds)

9

10

14

20

25

28

30

30

30

U.S. Equities (1 fund)

4

5

7

10

12

13

14

14

14

International Equities

(1 fund)

4

5

7

10

12

13

14

14

14

Global Equities (4 funds)

9

10

14

21

27

30

32

32

32

Canadian Bonds (3 funds)

65

61

45

24

9

4

0

0

0

Global Bonds (1 fund)

8

9

10

10

8

3

0

0

0

Global Real Estate (1 fund)

1

1

3

6

8

9

10

10

10

Cash

0

0

0

0

0

0

0

0

0

Total

100

100

100

100

101

100

100

100

100

 

MFS LifePlan Target Risk- Target Asset Class Allocations

Current Target Allocations

Income

Growth & Income

Growth

Canadian Equities (1 fund)

18

28

38

Global Equities (1 fund)

18

28

38

Canadian Bonds (1 fund)

60

40

20

Cash (1 fund)

5

5

5

Total

100

100

100

       
New Target Allocations

Income

Growth & Income

Growth

Canadian Equities (3 funds)

12

18

24

U.S. Equities (1 fund)

6

9

11

International Equities (1 fund)

6

9

11

Global Equities (4 funds)

12

18

26

Canadian Bonds (3 funds)

52

31

11

Global Bonds (1 fund)

10

10

10

Global Real Estate (1 fund)

2

5

7

Cash

0

0

0

Total

100

100

100


As illustrated in the tables above, the enhancements include 12 additional underlying funds, which provide diversification across and within asset classes by style, geography and interest rate exposure, as follows:

  • Canadian Equity will now include style-specific offerings, such as Value, Growth and Research.
  • Global Equity will now include style-specific offerings such as low volatility, and regional offerings.
  • Canadian Fixed Income will now include a broader utilization of fixed income offerings, including short-term, universe and long-term bonds.
  • Global Fixed Income will now include a Global fixed income fund which increases diversification benefits.
  • Specialty will now include a Global Real Estate fund, which is expected to increase diversification benefits.
  • Cash will eliminate exposure to Money Market funds in favour of short-duration fixed income.

LifePlan Target Date glidepath roll-down and rebalancing
The LifePlan Target Date funds will follow a daily incremental roll-down, meaning the target weights evolve on a daily basis down the glidepath, as follows:

  • Targeted daily cash flows: Inflows are first directed to portfolios which are under target weight. Outflows are first taken from portfolios which are over target weight.
  • Quarterly: Conditional rebalancing if weights deviate materially from target.
  • Event-driven: Conditional rebalancing in extreme market conditions if weights deviate significantly from target.

Benchmarks
The LifePlan Target Date and Target Risk fund benchmarks will consist of target weights in each of the four indices: S&P/TSX Capped Composite, MSCI World (Net), DEX Universe Bond Index and FTSE EPRA/NAREIT Developed Real Estate Index (unhedged). For the LifePlan Target Date funds, the blended benchmark allocations will change monthly to reflect the evolution of the corresponding funds' glidepath.

MFS LifePlan Funds Portfolio Management team
The LifePlan funds will be managed by Joseph Flaherty, Portfolio Manager, who has 28 years of industry experience. Mr. Flaherty will be supported by Natalie Shapiro (Lead Analyst - 25 years of industry experience) and Dino Davis (Institutional Portfolio Manager - 19 years of industry experience). Mr. Flaherty joined MFS in 1993 and serves on the MFS Investment Management Committee, MFS Global Equity Management Committee and MFS Fixed Income Management Committee. He is Director, Quantitative Solutions, Chief Investment Risk Officer and Quantitative Portfolio Manager.

The Quantitative Solutions team will assume responsibilities of the LifePlan Funds from the legacy McLean Budden Asset Mix Committee. As a result, tactical asset allocation decisions will no longer be part of the investment process.

How does this affect you and your plan members?
Plan members will not see a transaction in their accounts as these changes impact the underlying funds. However, the changes may result in a capital gain or loss to the underlying funds. For members in non-registered plans, the capital gain or loss will be combined with all other investment activity within the MFS LifePlan funds for the year and may be offset.

We will communicate these changes, including potential tax implications, to plan members via Morningstar® and on their 2014 Q1 and Q4 statement messages: in March and December (respectively).

Questions?
Please contact your Sun Life Financial Group Retirement Services representative.