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 fund listed below, which is established as a segregated fund under the Insurance Companies Act (Canada).
On September 30, 2023, the Schroder Diversified Growth Fund (“the Fund” or “DGF”) will change its benchmark from inflation (CPI) + 4% to Cash + 4%. The proxy for Cash will be the 90-day Canadian Treasury Bill Index.
The benchmark change will apply only on a go-forward basis. As is customary, the manager won’t change the benchmark retroactively.
Schroders originally set the inflation + 4% target as a proxy for long-term equity-like returns. However, due to the significant gap between cash and inflation in the current inflationary environment, the manager has revaluated the benchmark. Schroders believes that shifting to Cash + 4% provides a more accurate representation of achievable returns, while maintaining the risk profile and investment structure of the portfolio.
The manager made similar benchmark changes to other DGF mandates in different regions around the world. For example, the U.S. DGF mandate had a Cash + 4% target since inception. Similarly, Schroders recently made a benchmark change for the UK DGF mandate from inflation to Cash.
Our View:
The GRS Investment Solutions Team doesn’t have concerns with this change. There are no changes to the investment process as part of this announcement. The purpose of a benchmark is to act as a reasonable measure for performance. While it was historically fair to expect the Fund to achieve its CPI +4% benchmark, persistently high inflation increases the absolute return target to a level that may be unattainable with reasonable risk. While the fund will have some inflation-sensitive investment exposures, it is not structured as an explicit inflation hedge. The return on cash should represent a better barometer of investment return opportunities than the rate of CPI increase. Also, the current return on cash (5.0% as of July 31, 2023, as measured by the 90-day Canadian T-Bill Index) exceeds the current rate of CPI increase. So the impact of the change on the benchmark’s go-forward return is difficult to predict.
The fund’s objective is to achieve reasonable absolute returns with two-thirds the volatility of equities through a diversified multi-asset approach. A Cash + 4% benchmark will provide a reasonable absolute return target on a go-forward basis.
We will continue to monitor the fund and provide updates if necessary.
Do you have to take any action?
You and your members don’t have to take any action as a result of these changes.
Questions?
Please contact your Sun Life Group Retirement Services representative.
