Independent consultant Ned Cazalet, who foresaw the dec-line of with-profits, is casting doubt over the viability of equ-ity-based investments as long-term savings vehicles.
Speaking at a Cazalet Consulting conference this week, he said falling equity returns, increased market volatility and providers' inability to charge within 1 per cent question the attractiveness and shelf-life of such products when investors can easily get over 5 per cent for cash held on deposit.
Cazalet said investment returns have been compressed to such an extent that the adv-antage of holding equities over gilts – abundantly clear in the 1990s – has now gone. Equity returns are trending down to a 6 per cent a year return in line with average performance over the past 100 years, he said.
Cazalet said the problem is particularly acute for with-profits investors. Many life offices are looking to maintain equity exposure within their with-profits vehicles in a bid to provide better returns but are failing to achieve this because fully hed-ging its equity portfolio can cost a with-profits fund up to 6-7 per cent of its return annually while average new business acquisition costs have averaged 2-3 per cent annually compounded over the past four years.
He pointed to split caps and precipice bonds as examples of failed attempts to wring better returns from poor equity markets. He said: “Even if pro-viders write products costing 2 per cent, you have to ask, what is the point.”
Skandia investment marketing manager Ian Thomas says: “Risk-adjusted returns are not looking as good as they used to but evidence over the long run still points to equities and equity funds as good medium to long-term investments as part of a diversified portfolio.”