But the reality is that today’s smoothed funds bear only a passing resemblance to with-profits investments of the past – indeed, not all of them are even with-profits products.
The product providers still retain a certain degree of discretion, for example the right to suspend smoothing if it puts overall investor security at risk, but the days of the annual and terminal bonuses and discretion for actuaries in grey suits are long gone.
Our job as providers is to demonstrate that we have addressed the questions around transparency that were asked of smoothed products in the past and continue to cloud the thinking of potential investors.
We also need to make sure that our funds, smoothing mechanisms, products and charges are as simple as possible and we help advisers understand them and explain them to their clients.
It is also important that we are sure that clients understand that although smoothing can help to reduce some of their anxiety, it doesn’t mean that the value of their investments cannot fall – although some providers may offer guarantees through some of their products, for example that on offer through the LV Isa to investors in our Isa cautious fund.
Understanding the market for smoothed funds
Although the principle is the same, the way that different providers achieve their smoothing varies quite considerably.
These differences will have an impact on how simple it is to explain the smoothing mechanisms to your clients and will show how some providers value the role of third-parties in terms of management and rating of their funds, while others prefer to keep things in-house.
At LV our range of funds are smoothed using our unique mechanism which is based on a 26-week rolling average of the underlying fund price which we believe makes it simple to understand and explain to your clients.
After an initial 26-week period, the units purchased with the client’s investment are priced at an average of the underlying fund’s value over the previous 26 weeks.
The result is a smoothing process that protects clients against daily fluctuations in the value of the underlying assets.
Other variants use different types of mechanism that can arguably provide an even smoother investment journey, but can and have led to abrupt revisions to the unit price.
For example, the PruFund smoothing mechanism is delivered through an expected growth rate – the expected annualised return from the underlying assets over a period of time.
The unit prices increase on a daily basis according to the expected growth rate, and the smoothing process comes in to play on a daily and quarterly basis based on the gap between the value of the unit price and the underlying fund.
