For more than a decade, the with-profits story has stuck to a similar theme: dogged survival despite accusations that the funds are outmoded and archaic and suggestions that modern multi-asset solutions are a better fit for investors.
Jeremy Askew, managing director at Town Close Financial Planning, sums up the sentiment for many intermediaries. “I don’t see much of a future for with-profits [funds] and I don’t think the providers do either. Returns are generally moribund, costs opaque and it’s an odd concept to explain to clients,” he says.
Table 2 of Money Management’s 2018 with-profits bonds survey shows interest remains muted. But the concept – or a version of it, at least – is still finding favour in some quarters. Newer approaches that aim to offer smoothed growth while ironing out investors’ bugbears with traditional with-profits, such as widely fluctuating final bonuses and market value reductions, have gained traction.
This year the popularity of these products has shown no sign of abating, with Prudential’s PruFund range seeing £6.6bn of net inflows during the first nine months of 2018 alone. But other developments show that parallels can still be drawn with the traditional with-profits ethos. In late October, one of the PruFund range implemented a downward unit adjustment of 2.5 per cent in response to worsening market conditions, its first drop since 2013.
In a similar vein, one of the plans we have surveyed this year, by Healthy Investment, is applying a 2.5 per cent MVR on traditional with-profits bonds taken out in the past year.
Any product investing in equities will have struggled during 2018, and with-profits is no exception. Previous performance was healthier. A report by Barnett Waddingham, published earlier this year and analysing 52 funds from 20 providers, found the average with-profits fund grew 6.2 per cent over the year to December 31 2017. The five-year figure was healthier still, increasing by an average 6.85 per cent a year.
Critics will undoubtedly point to stellar growth in equity markets over the same periods, and perhaps rightly so. But as Barnett Waddingham states, with-profits funds are often promoted as an alternative to cash, and those returns exceed cash rates and inflation.
The past 12 months, however, have proved a different story for both equities and subsequently with-profits portfolios.
Table 3 shows the average fund grew 2.5 per cent in the first 11 months of 2018, barely beating October’s consumer price index reading of 2.2 per cent. The instability of markets has only continued since then – the FTSE 100 dropping to a two-year low in early December being a case in point – meaning year-end figures are unlikely to be any better.
But with markets exhibiting their first sustained wobble for quite some time, the question is: could advisers cater for nervous and cautious investors by leaning towards with-profits to provide the required security without sacrificing equities for cash?
Tony Catt, compliance officer at TC Compliance Services, believes so. He still sees advisers using with-profits as part of a wider portfolio of investments.