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From weak to strong

Many advisers are currently re-evaluating their clients&#39 with-profits investments. Despite the rally in recent months, the downturn in stockmarkets in recent years has taken its toll on the financial strength of with-profit funds, with various results.

Some funds have closed to new business. Some have set bonuses to zero. Others remain open and continue to pay bonuses but will have to hold lower-risk/ lower return assets in their fund which will have a detrimental effect on future performance.

Those better prepared for the stockmarket downturn remain financially strong and have good growth prospects. The latter group is sometimes forgotten or gets tarred with the same brush as their weaker counterparts but this is a huge mistake.

Financial strength is essential for with-profits. Never has this been so evident than in the last couple of years.

Financial strength is important because it allows a company to support bon-uses in difficult times for longer and it means a company can remain open to new business.

Zero bonuses and closure to new business are symptoms of financial weakness. Financial strength also brings investment freedom. A strong company is better placed to deliver competitive returns because it does not have to limit itself to lowrisk/low return assets.

There are some advisers and investors who have lost faith in with-profits and if you count yourself among them, it is worthwhile checking that the cause is not fund-specific. It would be frustrating to leave with-profits for the wrong reasons.

It might help to reconsider the following:

•With-profits gives investors the opportunity to invest in a pooled fund consisting of equities, property, gilts and cash •The diversification of the fund and the smoothing mechanism helps deliver smoother returns.

•With-profits funds aim to provide a better return than cash, with lower volatility and risk than equities. In periods of good stockmarket performance, you would expect the returns from a with-profits fund to be lower than equities. In periods of poor stockmarket performance, you would expect the opposite to be true. This has been demonstrated in the difficult market conditions of the last few years.

If these characteristics appeal, then you need to ask yourself what is the real issue. If it is financial strength that you are worried about, you could switch to a stronger fund.

You can consult a company such as Standard & Poor&#39s to evaluate the financial strength of different funds before deciding if you should move and, if so, who you should move to.

If you are concerned about some other aspect of with-profits, you should think hard before you make a decision.

Lower bonus rates than a few years ago might be a problem but in isolation, they are not a cause for concern. If the reason for the reduction in bonus rates is a sub-optimal asset mix or poor fund management, then you would be right to be consider moving.

However, bonus rates are lower generally because the economic environment is not what it was in the 1990s. Things have changed, inflation is lower, returns are lower.

If the problem is MVRs, it might be worthwhile remembering that MVRs, although unpalatable, are there to protect the with-profits investors remaining in the fund.

They have played a key role in ensuring fairness among policyholders and maintaining the financial strength of funds.

If you have clients in weaker with-profits funds or you are considering with-profits for new investments, there are products designed for that particular need.

It is important, as with all financial decisions, to consider the options carefully and I would advise against moving money out of with-profits without carefully considering the facts.

Leaving a weak fund does not mean that you have to leave with-profits completely – you could move the investment to a stronger provider.

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