LLQP Segregated Funds & Annuities · Component 2.1 · 30% of the exam
A client complains that her balanced segregated fund returned less than the stock market index last year. The agent should explain that:
- Athe fund has been mismanaged and should be switched to an index fund immediately
- the fund holds bonds as well as shares, so a stock index is not the right comparison
- Cbalanced funds are designed to match a stock index in every year without exception
- Dthe insurer will make up the shortfall between the fund's return and the index at maturity
Correct answer: B) the fund holds bonds as well as shares, so a stock index is not the right comparison
A balanced fund should be measured against a blended benchmark reflecting its mix of shares and bonds. In a strong equity year the bond portion will hold the return back, which is the same feature that cushions the fund in a falling market.
Why the other options are wrong
- ALagging a stock index in one year is expected behaviour, not evidence of poor management.
- CA balanced mandate deliberately dampens both the gains and the losses of the equity market.
- DGuarantees apply to the deposit amount at maturity, not to a market index comparison.
Exam tip
Always compare a fund with a benchmark that matches its own asset mix.
Common mistake
Judging a balanced or conservative fund against a pure equity index.
What this tests
CISRO competency component 2.1 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Segregated Funds & Annuities module. Written against the published curriculum.
More from component 2
- A segregated fund's 'guaranteed amount' after a partial withdrawal under proportional reduction is:
- A distinctive estate advantage of a segregated fund over a non-registered mutual fund held jointly with a child is:
- Segregated fund guarantees are most valuable relative to their cost when:
- A segregated fund's annual statement reports:
- Compared with a segregated fund, an exchange-traded fund (ETF) generally offers:
- A segregated fund's 'automatic death benefit reset' feature:
Practice the whole Segregated Funds & Annuities module
Timed sets weighted like the exam, and review of every question you miss. Free to start.