Little cheer for with profits in 2010

David Burrows

Jan 25th 2010

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person adding up using a calculator With profits investors should brace themselves for disappointing returns despite the strong stock market performance since mid 2009.

This is according to IFAs who feel with profits funds are just not cutting it when it comes to performance.

Fraser Heath, an IFA company based in Bristol provides a with profits healthcheck and is concerned that in many instances the diagnosis is very grim indeed.

With profits specialist at Fraser Heath, Miles Hendy concedes that in the past with profits delivered good returns with a degree of stability for investors but he insists that today they are a very different proposition.

Weak performance

Hendy argues that increasing market volatility and declining new business means many with-profits funds are significantly underperforming other cautious but non with-profits vehicles.

He points to the most recent figures from Aviva which shows that its main with-profits fund made a 6% after-tax return in 2009, which compared to 10% return on the Aviva Cautious Managed NU Life fund.

Martin Bamford, IFA with Surrey-based Informed Choice agrees with Hendy that despite the stock market recovery through the summer of 2009, with-profits funds will fail to live up to the expectations of many policyholders.

"With Profits funds are likely to disappoint investors this year, even if we have another strong period of equity performance.This is due to two factors – the performance of the underlying fund and the smoothing mechanism which restricts the allocation of bonuses.

Restricted exposure

"Many with-profits funds are now restricted in terms of their exposure to equities, which holds back performance when markets go roaring ahead. With- profits funds with large allocations to fixed interest securities could suffer particularly badly this year, if the anticipated fall in Gilt values materialises.

Bamford added that even if the underlying with-profits fund performed well, investors could still face disappointment because the actuaries who determine bonus allocation hold back returns in good years to 'smooth' the returns in poor years of investment performance.

"If you are investing for the longer term, with-profits probably no longer fits the bill as a suitable investment vehicle. Investors are usually better off investing in a diversified portfolio of investments, spread across the main investment asset classes, where they get direct returns when the fund or markets perform in a certain way."

Policyholders lose out

Hendy also pointed out that Aviva with-profits policyholders could lose thousands of pounds by not understanding the effect of the company's No MVR (market value readjustment) Guarantee carry-forward feature.

"Policyholders should look closely at the underlying returns of the fund and ask whether the nature of insurance companies reducing risk to protect financial strength, often when risky assets are near their lowest values, is the right strategy for their money".

"I'm very concerned about Aviva's carrying forward of the no MVR guarantee for With Profits Bonds and how this is likely to encourage policyholders to take no action.

"Unfortunately, taking no action on the 10th anniversary of a With Profits Bond with a no MVR guarantee is likely to cost the policyholder thousands of pounds of lost opportunity while allowing Aviva to continue to cream off their annual charges. I wish we could get this message understood by the tens of thousands of policyholder affected with Aviva and other providers."