Investments  

With-profits funds weather tough market

With-profits funds weather tough market

With-profits funds have produced positive investment returns despite a difficult year for equities, but advisers have mixed views about products.

According to research from self-invested personal pension (Sipp) provider Barnett Waddingham, published today (August 15), with-profits funds achieved a strong performance over both one-year and five-year periods.

Its research, which covered 41 funds across 23 insurers for the period ending December 31, 2018, found the average annualised fund performance over a five-year period was 4.48 per cent.

All of the 41 funds had positive returns and there were no material decreases in equity despite a fall in the equity market in the final quarter of 2018 after a rocky start to the year.

The firm stated this suggests that rather than reacting to short-term market issues these types of funds were taking more of a long-term outlook.

With-profits investments provide a significant portion of the long-term savings, pension and retirement income provisions for UK savers.

Money invested into a with-profits fund is pooled with other investors' money and invested in a mixture of shares, equities, bonds, property and cash over a set period of time.

However, with-profits use a smoothing mechanism which aims to reduce the direct impact of market changes on the fund investments and means that investors are less exposed to rises and falls in the value of their investments over the shorter-term.  

Due to this the popularity of with-profits funds remains mixed among advisers.

Tim Morris, independent financial adviser at Russell & Co, said: "I'm not a big fan of with-profits. The clients I invested with them recently tend to be more cautious than those who are comfortable investing heavily in equities.

"Those who are have really seen the benefit of the markets picking back up this year."

But he said he had clients with one with-profits provider that was on his panel prior to becoming an IFA.

"They always seem to offer a consistent steady return," he said.

He added: "They are less popular amongst [clients] than they used to be when I started investing into with-profits funds around 10 years ago. And there are less of them available."

Scott Eason, partner at Barnett Waddingham, said: “With-profits funds have been in and out of popularity with the adviser community over the years, however our research really does show that the funds are still standing up to scrutiny despite the difficult year for returns.”

But, he warned that advisers must not put too much onus on the level of equity returns but should also track the performance of cash and other assets.

Mr Eason said: “As equity is the largest component of most funds, equity returns are clearly important to achieve a strong performance overall.

“However, firms need to spend as much time and effort ensuring performance on non-equity assets; they must not forget that these make up more than 50 per cent of the majority of funds.