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Mix marriages

In my last few articles, I have looked at issues relating to the projection of investment returns and volatility from with-profits funds (including Equitable Life and the AMP companies) and managed funds.

I have centred this discussion on the asset allocation within these funds, with particular attention to the fact that the higher the proportion of cash and gilts, the lower must be the projected returns.

However, I have had a few phone calls from IFAs who have interpreted my comments wrongly as inferring that there is little or no room for with-profits or managed funds in most clients&#39 portfolios. What role might these funds have in financial planning? Let me suggest a few examples, using my own firm&#39s practice by way of illustration.

Most readers will be aware that a major part of my practice deals with pension transfers. On the face of it, this business might appear to rely only on detailed technical pension knowledge but in reality this is only half the story. If our analysis indicates that it would be the pension client&#39s best interests to transfer, we would transfer them. The target rate must drive our suggested asset allocation which, over the years, I have formulated mostly according to the period of years until the client&#39s retirement and his or her attitude to risk, as the table opposite illustrates.

Now, I am not suggesting that these asset allocations should be a definitive guide for every adviser and other factors apart from time period and risk determine the eventual recommendation. However, by way of example, let us look at the suggested asset allocation for a client with a medium acceptance of risk who has only a short term to retirement – 50 per cent cash, 15 per cent property, 20 per cent fixed interest and 15 per cent equities.

In an ideal world, for a portfolio (in this case, from a transfer value) of a few hundred thousand pounds, we might suggest at least one fund for each asset class, possibly with different fund management groups.

But suppose this transfer value is only £20,000. Clearly, a self-invested personal pension will be impractical as a vehicle to select funds from different providers. Also, I would suggest that many clients (let alone their advisers) in this situation might even consider four different funds from the same insurance company as complicating the issue. Could a with-profits or managed fund be appropriate? I think so.

A very cautious managed fund often recommended by my firm invests in these four asset classes (cash, property, fixed interest and equities) in roughly equal proportions. Directing 65 per cent of the client&#39s money to this fund and the remaining 35 per cent to a cash fund would achieve almost precisely the target asset allocation.

A further example could be a medium-term portfolio for a medium-risk client which, as you can see from the table, suggests a mix of 25 per cent property, 35 per cent fixed interest and 45 per cent equities.

A number of good quality managed and with-profits funds have asset allocations very similar to this mix, apart from the high property content, so a recommendation might be 85 per cent managed or with-profits and 15 per cent property. Not any old managed fund, of course, but one whose asset allocation matches our requirements, say, 50 per cent equities, 40 per cent fixed interest and 10 per cent property so that, when the additional 15 per cent in a property fund is included, the suggested mix is achieved.

As a final example, looking at the suggested asset allocation for a mediumto high-risk investor over the medium to long term – 15 per cent property, 20 per cent fixed interest and 65 per cent equities – this is entirely typical of a small number of with-profits funds which are still committed to long-term attractive returns through a sub- stantial equity content (NPI, Pearl and Equitable Life eat your heart out) and a number of balanced managed funds. Here, probably only one fund need be recommended to achieve the desired asset mix.

I am by no means suggesting that the asset allocation table should be adopted by every adviser and nor am I suggesting that the convenience of managed and with-profits funds is appropriate to every investor. I am merely using these examples to illustrate the main point I have made in my last few articles, that the asset allocation within this type of fund varies between providers, with a number of providers offering a range of mixed funds to provide different asset allocations for use in different circumstances.

In conclusion, I firmly believe that managed funds and selected with-profits funds have a significant part to play in the portfolios of a significant proportion of investing and pension clients but only after due consideration of the underlying asset allocation within each fund.

In my next article, I will be looking at a subject very dear to the hearts of those of us who worked in financial services during the 1980s – the churning of protection policies, mortgages, pension contracts and even lump-sum investments. Great fun.


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