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F&C clones with-prospects



Type: Oeic.

Aim: Growth and income by investing in UK and overseas equities and fixed-interest investments.

Minimum investment: Lump sum £2,500.

Investment split: International equities 60 per cent, investment grade bonds 40 per cent.

Isa link: Yes.

Pep transfers: Yes.

Charges: Initial 5 per cent, annual 1 per cent.

Commission: Initial 4 per cent, renewal 0.25 per cent.

Tel: 0845 6001868.

Suitability to market 7.7

Investment strategy 7.0

Past performance 6.0

Company&#39s reputation 7.0

Charges 6.7

Commission 6.7

Product literature 7.4

The panel: Bruce MacFarlane, Partner, Capital Trust Financial Management,

John Holian, Certified financial planner, Maunby Investment Management,

John Wright, Proprietor, Investment Management Services.

Foreign & Colonial&#39s with-prospects fund is an Oeic that works in a similar way to a with-profits bond. It invests in a portfolio of stocks from the UK and overseas, plus fixed-interest investments.

Assessing the market suitability of the fund MacFarlane says: “With the current extreme levels of volatility being experienced in global equity markets, the with prospects fund should certainly find a welcome reception from those seeking a product which offers lower to medium-risk income or capital growth on their savings.” Wright says: “It fits very well, a first class concept.”

Holian says: “It provides a real alternative to with-profits funds and other low-risk investment. One argument used by many providers in the past for not using unit trusts and Oeics has been the availability of a with-profits fund in a bond. This fund gives an opportunity for an alternative strategy.”

Identifying the type of clients the fund could attract Wright says: “Medium to low-risk investors with tax planning also in mind.” Holian says: “Mainly lower risk investors who are looking for long term returns better than a building society account. Those who may be traditionally steered towards with-profit bonds can now use their capital gains tax allowance against gains. This should have an effect on longer term returns.”

MacFarlane says: “The fund is suitable for clients seeking low to medium-risk returns from a balanced portfolio. Income can be taken on a regular basis by the sale of shares, which, if wrapped in the Isa, will be free from income taxation.”

Considering the fund&#39s marketing potential Holian says: “Personally, it does not present any new marketing opportunities, though others may wish to revisit clients who have been wary of investing in the past.” MacFarlane says: “While I do not believe this fund will replace traditional with-profit bonds, it will offer a well thought out alternative. Isa investors and clients seeking to transfer Peps to a lower-risk investment reduction who could not access with-profits funds in the past will find the with prospects fund an attractive solution to their problems. Wright says: “Midway between deposit accounts and equities. It is just the acceptable place for almost any investor at this time.”

Discussing the strong points of the fund Holian points to the ability to use one&#39s capital gains tax allowance. MacFarlane says: “The fund will try to emulate a with-profits fund, while at the same time providing investors with clear information regarding charges and investment valuations. Income can be taken on a regular basis and an Isa wrapper used to increase the tax efficiency of income taken or capital growth achieved. While the fund does not provide any guarantee a conservative target level of expected growth is set each year, currently 5 per cent.”

Wright says: “It is a with-profits style fund using F&C&#39s expertise in derivatives. It has useful switching to an Isa each year automatically and a full £7,000 can be utilised. It has excellent open charging.”

Looking at the fund&#39s investment strategy Holian says: “It invests 60 per cent in equities which is much less than many with-profits funds. Presumably, this is balanced off with appropriate bonds to give a smoother fund. I can see the benefits of this as the fund is transparent and volatile performance cannot be hidden.”

MacFarlane says: “The investment strategy and risk profile is similar to that of a with-profits fund and as such should provide for similar returns given the longer term.” Wright points out that it will invest in equities but will also use options.

Pointing out the fund&#39s drawbacks MacFarlane says: “Income taken from the fund is based on the NAV price of the Oeic and not on the proposed prospect price for the fund set each year. During periods when the NAV price is lower than the prospect price, investors who sell shares for income may be doing so without realising the potential damage they are doing to their fund value. Advisers may initially shy away from this fund until it establishes a track record and proves its worth.”

Holian says: “While the fund offers the smoothing effect with its investment strategy and prospect price, there are no guarantees. At the end of the day, it becomes another low-risk managed fund.” Wright cannot see any disadvantages for a lower-risk investor.

The panel assess the company&#39s reputation. Wright says: “It is absolutely first class. It did have a problem with its high income fund a few years ago, but dealt with this problem in a very sympathetic manner.”

MacFarlane says: “The overall reputation of the company is good but I feel it has taken time to recover from the unfortunate poor press surrounding its higher income plan many years ago.” Holian says: “The Foreign & Colonial investment trust is well known and respected. Whether clients are as aware is another thing.”

Moving on to past performance Holian says: “It is certainly more active in investment trusts, but without funds to compare directly with the make-up of this fund I see Foreign & Colonial investment trust as having above average performance proving, it has ability in managing international equities.” MacFarlane says: “Across most funds the investment performance is good.”

Identifying the potential competition Wright suggests student accommodation or ground rent funds, offshore funds and traded endowment policy funds. MacFarlane says: “With-profit funds will still be sold in preference to the with-prospects fund and as such I see its main competition as other safety-orientated contracts such as Close Brothers escalator funds.”

Holian says: “Other lower-risk funds such as Investec capital accumulator, some equity and bond funds, well covered zeros and property funds like the Norwich property trust.”

Wright considers the charges normal and MacFarlane says: “On this type of product, the charges are reasonable considering the product is designed for a minimum investment period of 10 years.” Holian says: “An annual management charge of 1 per cent is good compared to some funds, but the 5 per cent initial charge is high.”

Assessing the commission, MacFarlane says: “I would rather see a lower initial commission and greater renewal, perhaps 3 per cent initial and 0.5 per cent renewal.” Wright feels it is normal. Holian says: “As fee-based advisers we would rebate the initial charge to benefit the client. The 0.25 per cent renewal is lower than the 0.5 per cent available elsewhere and could reduce its appeal where this remuneration is an important aspect of an adviser&#39s turnover.”

Looking at the product literature, MacFarlane considers it smart and easily read. Holian finds it is pleasant and clear, while Wright thinks it is very good.


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