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Analyst sees a bright future for WP bonds

Despite bad publicity surrounding with-profits bonds, a report from Datamonitor predicts a bright future for the products.

However, the firm says the future of the with-profits market is in the hands of IFAs and urges them to recommend the products.

Datamonitor forecasts sales to increase by 15 per cent annually to £560m by 2008 from £277m this year as customers and IFAs regain confidence in the long-term benefits of with-profits products.

Financial analyst Annabel Gorringe says the entire with-profits market has been tarred with the same brush but the issues do not apply equally to bonds and endowments as their uses are very different.

Between 2000 and 2003, sales of with-profits bonds fell by 40 per cent, driven by IFAs switching their allegiance to unit-linked products, which grew by 13 per cent.

But Datamonitor suggests there is evidence of a recovery and is forecasting a gradual revival. One leading bond provider said its Q4 2003 sales were up a third from the third quarter and data from the ABI shows a stabilisation towards the end of this year.

Datamonitor says it will take time for product providers to replenish their with-profits reserves and predicts that one problem that providers will face is the lag between these improvements and the pick-up in global equity markets.

Customers have seen improved performance from other products while with-profits have continued to give low returns.

Gorringe says customers forget that the same smoothing mechanism that causes this often shielded them from the worst of the market downturn.

Datamonitor believes that transparency is the key to recovery of with-profits bonds and customers must be educated regarding the pros and cons of various investment products.

Gorringe says: “The future of the with-profits market is therefore in the hands of IFAs and is dependent on them recommending the product to their customers. Providers must also improve product performance by adjusting the asset mix of with-profits funds.”

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