Fixed interest insulates with profits

Life offices that have shifted investment holdings into the fixed interest sector for with profits funds have successfully restricted larger drops in maturity value suffered by their rivals, according to Money Management's latest endowment survey.

Overall investment in equities dropped from 39.3% in 2008 to 30.9% this year, while investment in fixed interest has jumped to 43%. Only companies with high holdings in fixed interest assets in the underlying funds posted positive gross returns this year. Red Rose's fund, for example, returned 4.8% with 80.6% invested in fixed interest, and Britannia, which returned 0.1% with 50% in fixed interest assets.

The contraction of equity values has depressed the great majority of with profits funds.Worst hit was the Wesleyan, which has 57% of its fund invested in both UK and overseas equities, seeing its gross annual return fall to -21% this year.

However, despite significant drops in maturity values this year, with profits endowment policies have performed heroically amid falling interest rates compared to equivalent tracker funds and cash accounts. Over 25 years, for monthly contributions of £50, the average with profits policy taken out by a male aged 30 next birthday at outset, has paid £44,656, 37% more than the Balanced Managed sector and 51% more that of an instant access building society account. The average yield on a 25 year with profits policy was an impressive 7.8%, and this is without taking into account the tax relief on the premiums that still applied to policies taken out 25 years ago. Add that in and the with profits endowment returns are even higher.

Sheffield Mutual, the minnow friendly society, has yet again dominated the results, paying 13.2% AGR on its 10 year policy, returning £11,935 on the £6,000 overall premium outlay, and £49,281, 12.6% AGR on its 20 year policy, 52% higher than the average.

Healthy Investment, another friendly society, topped the 25 year payouts, paying out £87,538, 12.2% AGR, significant growth on the £15,000 overall investment. Only Phoenix Assurance, at £267,958, currently paying high terminal bonuses from its inherited estate could pip Healthy's returns.

But even the big providers have shown encouraging results in this year's survey. Prudential, Norwich Union, CGNU, and Commercial Union have all increased payouts on 10 year policies. Prudential, which has 10,911 policies maturing after 10 years, paid a terminal bonus of £1,871, which equates to 24.1% of the £7,770 overall payout.

Meanwhile, Norwich Union paid £475m in bonuses to over 730,000 policyholders this year, irrespective of its cancellation of the proposed £1bn reattribution it announced last month. The full survey appears on page 38.

gareth.shaw@ft.com