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Scottish Equitable has closed its with-profits funds to new business and replaced it with two smoothed managed funds. It has somehow been given permission to call these funds the with-profits growth fund and the with-profits cautious fund, a move likely confuse potential investors.

That said, while many funds have claimed to be an alternative to with-profits, these new funds probably get the closest to achieving that aim. The funds do have some distinct advantages over with-profits funds. They offer greater transparency for investors, who can clearly see what their underlying fund has returned and how much is attributed to their policy.

Investors should also get a greater proportion of the growth in the underlying investment fund as they do not have to pay the costs of guarantees, which are usually inherent in with-profits funds.

Another factor, and one of the major reasons why this type of product is likely to be offered by more life insurance companies, is that, unlike with-profits, these smooth managed funds will not impact on the solvency and financial strength of the firm.

While these smoothed managed funds do have their advantages, they do not offer guarantees and will be more volatile than a with-profits fund. An investor must decide whether they are prepared to accept this extra volatility.

While I usually dismiss “alternatives to with-profits”, these products may appeal to a number of traditional with-profits investors. That said, while they are an alternative to with-profits, at this stage, they are not a replacement for with-profits.

Patrick Connolly is dir-ector Chartwell Investment Management

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