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.
“Through solid investment and reviewing all asset classes, with-profits policy holders could benefit from positive returns both in the medium and long term.”
But advisers are also sceptical about with-profits because of the mortgage endowment mis-selling scandal of the 1990s.
The scandal followed the sale of mortgage products based on with-profits funds, that promised to pay off one's mortgage and provide a nice bonus at the end of it.
For many people this worked, but the market got carried away and invested too heavily in equities.
Once the stock market turned, many investments turned sour and the products failed. A big part of the problem was the fact that the way the products were managed was opaque: the smoothing process, the way annual bonuses were paid, charges and even the value of a client's policy.
Andrew Tully, technical director at Canada Life said: “With-profits funds tend to be marmite – some advisers really like them while others are very unlikely to use them.
“The with profits name was tarnished back in the 90s so generally the name isn’t used that much. The best seller is Prudential who call it PruFund rather than use the with-profits name.”
According to Mr Tully, it is the smoothing mechanism which makes with-profits either favourable or unfavourable depending on a client's risk appetite.
Mr Tully explained: “Say the fund went up 8 per cent last year, the fund may only pay the client 5 per cent, keeping 3 per cent in reserve.
“This year the fund goes up 2 per cent so they use some of the reserves to give the client 4 per cent.
“There is a lack of transparency, and some people may do better due to timing of when they bought or sold the fund than others.
“But some people like them because you may not see as extreme falls or rises as other funds.”
He added: “For those clients taking income, a smoothed fund can help as volatility is low.
But there are many other relatively low volatility funds in the market which may outperform a with-profits fund, which may also be cheaper and have much greater transparency.”
amy.austin@ft.com
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