Do with profits funds still have merit?
In a word, yes. With profits investments have, and continue to, provide an alternative solution for those wishing to benefit from financial market highs over time while being relatively protected from any market lows.
The 2018 Barnett Waddingham with profits survey researched over £50bn of assets across 41 with profits funds and 23 insurers and found that every single fund achieved a positive return over a five-year horizon with BW stating that “Despite negative markets over 2018, the vast majority of funds delivered stronger returns over a five-year horizon and outperformed standard high-street savings rates”.
With profits funds are suitable for a non-expert investor as the smoothing and the reversionary bonus mechanism gives a baseline performance which can beat annual interest from bank accounts, while the final bonus gives potential upside.
A unit-linked investment has the potential upside, but not the risk management and the protection of a with profits investment, that is the downside to the upside.
This sort of performance profile is simply not available in bank savings or unit-linked savings.
The new generation of with profits portfolios are not “equity-or-bust” products as the 1990’s with profits were: they are multi-asset portfolios with a variety of profit-generators.
A better comparison for today’s well-run with profits funds is to Dutch pension funds, which combine a beta portfolio (risk management: matched interest and inflation assets) with an alpha portfolio (equity but also alternatives such as private equity, private debt, infrastructure, real estate, hedge funds, emerging market debt).
Note that the multi-asset with profits portfolio of today could not be replicated in the unit-linked space as there are no retail, daily-pricing, open-ended mutual funds that would give you access to such an alpha portfolio.
With profits investments are attractive for older investors, with many suggesting plans of this type are good for retirement as a decumulation tool with clients using drawdown products to access with-profits funds rather than buying an annuity.
With profits investments provide a strong alternative for investors of all ages.
The launch of the Lifetime Isa, with its 25 per cent government bonus, in addition to the potential with profits returns for plans backed by this type of fund, provides younger investors with the potential to achieve strong investment returns, while removing the volatility of the market, to support them with accessing the property market for the first time and also for those who are self-employed to save for their retirement.
One area which has had regulator focus is the profitability of with profits funds for investors.
The fund management approach taken will differ by provider and by the fund’s status, that is, whether it is open or closed.
At Foresters, we apply an active management approach and have recently retained AXA Investment Managers as our external fund managers.