Just over a year after the FTSE 100 was struggling to stay above 3,500, the markets have picked up and investor confidence is starting to grow. Some investors might be looking for a new home for the money they have been keeping on deposit. A traditional home for money formerly kept on deposit has been with-profits bonds.
With-profits bonds offer investors a low to mediumrisk investment where they can to pool their money with others in a well diversified fund that contains equities, property, corporate bonds and gilts as core investments. This diversification, plus the smoothing of ret-urns from the fund, holding back some of the return in good years to supplement poorer years, helps ensure that investors enjoy a smoother return that they would achieve by investing directly in equities.
Investors need not worry that good performance is sacrificed as a result of smoothing. Over the five years ending March 31, the Prudential with-profits bond, Prudence Bond, delivered a return of 20.8 per cent.* This compares well against equities (FTSE 100 total return) which earned a return of -19.8 per cent over the same time period. It is worth bearing in mind that past performance is not a guide to the future.
IFAs are well aware that the with-profits bond marketplace has changed dramatically over the last couple of years. In 2001, the market was more fragmented, six providers accounted for 78 per cent of IFA sales and the balance was made up by a number of smaller players.
By 2003, the market had matured and only four players accounted for the same percentage of sales, with the difference being made up by a fewer number of smaller players. Poor equity returns in the early 2000s weakened the financial strength of with-profits funds, in some cases to such an extent that the provider closed the fund to new business.
Future with-profits bond investors need not worry as there are still sufficiently strong with-profits bond providers to choose from.
Investors who already have a with-profits investment should look at the financial strength of their current provider to help determine its ability to produce future growth. Those in weak or closed funds might want to consider transferring to a stronger fund.
Since March 2003, equity markets have improved and some with-profits providers have reported impressive returns.
At the moment, with-profits bond providers are busy finalising their principles and practices of financial management for their with-profits funds.
Following the FSA's with-profits review and to help make with-profits more transparent, with-profits providers will be making their PPFMs publicly available from the end of April.
We believe this development will help restore consumer and IFA confidence and help restore press confidence in with-profits.
The PPFM will help clarify the use of discretion on with-profits funds and will reinforce the fact that the directors of life insurers are fully responsible for all decisions of their business, including those taken on actuarial advice. The PPFM will deal with many of the concerns about with-profits, particular those about clarity, governance and transparency.
So, what can we expect after PPFMs? Will they be the last with-profits development we will see for a while? You will not be surprised to hear that the answer is no. Nor will you be disappointed. The with-profits concept has been continually improved over time and we are not about to stop now. The evolution continues.
* The Prudence bond figure from Prudential is based on £25,000 invested in the optimum return fund over five years ending March 31. (£30,214). This includes both a final bonus of £399 and a market value reduction of £362 and an original investment of £25,000). Any gain depends on an individual's tax status.