How it works
Investment Strategy
The investments supporting BMO Insurance Whole Life policies form part of the company’s general assets and include two main components: fixed income exposure and enhanced equity exposure.
The fixed income exposure uses a buy and hold strategy; market fluctuations are not reflected in credited returns. Investments are in long-term corporate/investment grade bonds (AAA to BBB) with returns based on the portfolio yield.
The enhanced equity exposure returns combine call options with returns that are linked to the performance of low volatility indexes. For diversification, the performance of these low volatility indexes is linked to both the Canadian and US markets.
Fixed Income Exposure
The fixed income assets are part of our general account. We use a buy and hold strategy, so market value fluctuations are not reflected in credited returns.
Investments are in corporate/investment grade bonds (AAA to BBB) with credited returns based on bond coupons (portfolio yield) which generally increase with interest rates.
The BMO Long Term Corporate Bond ETF Yield to Maturity (YTM) provides you with a benchmark for estimating returns.
Enhanced Equity Exposure
Call Options
We purchase long-term call options which provide greater equity market exposure at a lower cost (compared to shorter term options). By selecting these longer period options, we seek to optimize returns and balance risk alongside the cost of these options.
Also, by using call options, we offer downside protection when markets are weak. We believe this approach is better than investing into actual assets since it limits potential losses to the option cost itself.
Low Volatility Indexes
The complementary component of our investment strategy is to tie the options to low volatility indices.
These low volatility indices measure the performance of a basket of the least volatile stocks that make up the given indices. Individual stocks are weighted relative to the inverse of their corresponding volatility, with the least volatile stocks receiving the highest weights. They are usually re-balanced every calendar quarter – allowing them to respond quicker to changing market conditions. Furthermore, the use of the low volatility indices provides lower call option costs which allow for higher participation in these markets.
Diversification
For diversification, the asset exposure on BMO Insurance Whole Life policies currently covers both the Canadian and US markets with returns indexed to the Low Volatility TSX (TXLV) and S&P 500 (SP5LVI) market indices.
Historically, these low volatility indices have typically outperformed their underlying broad market benchmarks on both an absolute and a risk-adjusted basis. This has resulted in higher returns with less volatility than their parent benchmarks.
We believe that this approach will result in better value for our policy owners, a higher participation in the equity markets at a lower cost with the added benefit of downside protection.
Asset Exposure Composition
The notional portfolio is based on an asset exposure mix of:
- Fixed income investments managed by BMO Asset Management Inc. and indexed to the yield of the BMO Long Corporate Bond Index ETF (ZLC); and
- Enhanced equity investments managed by BMO Capital Markets with returns indexed to the Low Volatility TSX (TXLV) and S&P500 (SP5LVI) market indexes
Enhanced Equity Exposure (TXLV and SP5LVI) Sector Allocation
By using these low volatility indexes which are usually re-balanced every calendar quarter - we can respond quicker to changing market conditions.
3 As of December 31, 2023.
4 Smita Chirputkar, Tianyin Cheng, Izzy Wang, Hamish Preston, Phillip Brzenk, S&P 500® Low Volatility Index: Five Decades of History (January 2020), accessed August 31, 2020.
5 Past performance is not an indication of future performance.