The adviser community will have noted that recently there has been a move by more big industry players to make smoothed and with-profits funds easier to access.
A greater number of smoothed life and pensions funds are appearing on platforms for use by UK independent financial advisers.
Their move onto platform means they can more easily be integrated into investment portfolios. And, ultimately, their arrival gives even more investors access to smoother returns in unsteady times.
But how do these funds operate? And are they all, fundamentally, the same? What will be the specific features that advisers will want to look out for when assessing their suitability for clients?
How do they work?
Let us start with first principles. What is smoothing?
Investment in the market always comes with risk.
And it can be tempting for advisers, and their clients, to steer clear of too much of it. Especially if the client is close to retirement or looking to preserve the value of their portfolio.
In short, not all smoothed or with-profits funds are made equal.Typically, advisers look to give investors a ‘smoother’ investing journey by diversifying their investments across asset classes, so that if some assets do well and others less well, the overall performance is not as heavily impacted as a concentration in just one class.
Smoothed and with-profits funds operate a similar diversified approach – moderating risk and reducing day-to-day volatility, but reduce volatility further by using an additional process.
They typically provide steady growth through a diverse asset choice and use a mechanism to reduce the impact of day-to-day price changes.
What this means in practice, is that in periods of high fund performance, some of the return is held back. This is then redistributed during periods of weaker fund performance.
Aside from the obvious advantage of lowering the risk of significant falls in value, it can also be a useful tool in the run up to decumulation, reducing sequencing risk and volatility drag.
A smooth return to the market
I like to think that the smoothed and with-profits revival is grounded in demonstrating the value of these products to ordinary investors.
Today, Wesleyan’s With Profits Fund holds more than £4bn of personal investments.
It has an FE Fundinfo risk score of just 11 (as at June 30 2023), which, when compared with the FTSE100, is an 89 per cent lower risk.
It pays to take a careful look under the bonnet of the products on offer.While the returns – and risk – speak for themselves, in the past the additional complexity of smoothing may have been off-putting to some investors and IFAs looking at including them in client portfolios.
Polishing the product and putting it on platform
Now, going on-platform can be complex, especially when ensuring that the product is suitable for advisers to incorporate into bespoke and model portfolios.
For funds and providers looking to enter the wider IFA/platform marketplace, these challenges range from finding suitable partners, to developing the fintech to support products and trading, right through to getting cut through to potential customers.
The result of these challenges is that, depending on the response, different funds with different trading and reporting mechanisms are created.
In short, not all smoothed or with-profits funds are made equal. And understanding where they are different is not always obvious.
As more companies go on platform, advisers will have even more due diligence to do.
Here is a rundown of some of the questions independent financial advisers should be asking when they investigate the smoothed with-profits opportunity.
1. Are they platform agnostic, or are they restricted to just one platform?
Some smoothed funds are available on the independent platforms. But others are only available on just provider-owned platforms because of their complexity.
As advisers know first-hand, platform choice can be a big decision. Some opt to access just one platform, to avoid the inefficiency of using multiple tools, whereas others would argue a multi-platform approach is the only way to achieve true independence for themselves and their clients.
When it comes to smoothed and with-profit funds, it is important to ask whether the products are available on multiple platforms, or restricted to just the providers own one.
The answer could indicate how much flexibility the product will have.
Funds that are platform agnostic are more likely to be traded just like an Oeic or unit trust, giving it the same flexibility as any other fund that is available on that platform.
The administration is all done by the platform, which avoids duplication or delays in processes as well as allowing the fund to be added to multiple platforms without constraint of administration.
2. Can they be blended with other assets to create bespoke portfolios?
The smoothing mechanism of any fund will dictate how easily traded those assets are and whether you can use them effectively on platform with other funds.
Some provide daily pricing, daily smoothing and daily trading, so advisers can get the instant information they need.
The current market is serving to further boost the profile of smoothed and with-profits funds.When your clients want to access their investments they can do so immediately – there is no need to wait for days or even weeks, unlike through the Novia platform, for example, where withdrawals are paid out within standard platform timescales.
That is important because being able to blend smoothed funds with other assets in bespoke or model portfolios is a big reason for using platforms in the first place.
3. What are the trading rules?
Another consideration should be the trading rules on the funds.
Ideally, it needs to act like any other Oeic or unit trust in a platform environment. This gives the same advantages of more familiar funds.
By doing this, advisers can ensure that they are giving their clients what they need, when they need it, and providing best-in-class service.
At Wesleyan, for example, we avoid investing in illiquid assets beyond a well-established property element that yields strong rental income. This value investment style generates dividend and coupon income – so strong cash flows.
4. Are they right for your clients?
For most people, investing is best done when there is time for any dips in fund performance to recover.
This typically means taking a long-term approach to investing and keeping money in the market for at least five years.
With smoothed and with-profit funds, the same principles apply. It is time in the market, not timing the market that matters.
5. A smoother future
One thing is clear, the current market is serving to further boost the profile of smoothed and with-profits funds, which are having something of a renaissance.
Amid challenging macroeconomic conditions – chiefly high inflation, rising interest rates and a greater degree of volatility – with-profits and smoothed funds are likely to see their popularity continue to grow as advisers and investors look to offset concerns and concentrate efforts on long-term returns.
But for those advisers and clients considering these funds for the first time, it pays to take a careful look under the bonnet of the products on offer.
It is increasingly apparent that not all smoothed and with-profits funds are created equal.
Nick Henshaw is head of intermediaries at Wesleyan
