With Profits  

How with-profits funds work

This article is part of
Guide to with-profits

With-profits funds work similarly to a balanced fund, in that they invest in a variety of assets - typically the usual equities, bonds, property and cash mix.

They were conventionally invested in equities, and produced strong returns until the dotcom bubble burst and they were forced to invest more heavily in bonds, which meant the returns were not so healthy.


In Barnett Waddingham's with-profits survey of 2018, researchers found a wide variety of asset classes, "although most could be described as balanced funds, with a mix of all major asset classes.

"On average, larger funds have larger holdings of equities and property, and these proportions have increased over the five-year horizon."

It found investment performance was dependent on two factors.

"The first is the high level asset allocation between the different asset classes, and the second is the stock selection within each asset class. Stock selection contains two sources of difference - the breadth of assets invested in within a class and the actual names held.

"Equities were the strongest performing asset class [in 2017], followed by property. Both performed significantly better than bonds. The bigger funds have the largest allocation to equities and property and hence benefited from this increased exposure," the survey states.

The Prudential With-Profits Fund is 18 per cent invested in UK equities, 33 per cent invested in overseas equities, 14 per cent in property and 26 per cent in fixed interest.

The balance is invested in alternative assets and cash. At the end of 2017, it had returned 10 per cent over one year and 56 per cent cumulative over five years, although this is before charges and the effects of smoothing.

Not everyone likes with-profits, because of the basic way they are constructed. The problem is the way that bonuses are determined each year, and the final bonus.

Some of the with-profits funds' critics claim that it is not clear how these are calculated and how much a policyholder's policy is truly worth.

It is basically up to the actuaries to decide how much can be allocated to the fund each year, and how much to hold back; sometimes they get this wrong and apply Market Value Reductions to adjust to the new realities.

Mark Stone, financial planning director at Whitechurch Financial Consultants, says: "They're not something that we use regularly but they are looked at. There are good with-profits funds that have a proven track record. 

"There are the customers who have held them for a number of years and the value has gone up every year."

However, many advisers are reluctant to use them because they can get more clarity on a unitised fund.