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Smooth operators

Fund managers say the vehicle of choice for medium-term equity exposure is changing for many consumers.

City investment groups such as Credit Suisse Asset Management are lining up medium-term products with downside protection to attract investors looking for alternatives to with-profits.

Credit Suisse head of product development Tony Hogbin says IFAs will play a crucial role in determining where their clients should keep their money. He says it will be vital for IFAs to assess whether cli ents&#39 with-profits policies are still fulfilling their objectives.

Investec Asset Management joint chief executive Andy Sowerby believes that clients should take advantage of penalty-free transfer windows to move their money out of with-profits funds.

Sowerby suggests closed with-profits funds have little incentive to perform well because their key concern is to match their liabilities. He thinks IFAs should be aware that the product risk profile has changed so much that, in many cases, it will no longer meet the needs of clients.

Hogbin says there are a number of alternatives available to investors who are looking for a degree of equity exposure. He says the mutual fund sector can offer clarity of investment in a way that with-profits cannot.

He says recent innovation means investors now have access to funds that will achieve real rates of return at all times which should be considered as competitive to with-profits. He believes Ucits 3 will enable some funds to target better returns in a wider range of markets.

Hogbin says: “With-profits has a long and diverse heritage but the bear market exposed its flaws when smoothing was undermined by market performance.”

Although Hogbin concedes that with-profits will remain a suitable investment for many people, he believes there is a challenge for IFAs to establish whether clients could do better elsewhere and says it is a matter of looking closely at the underlying investments.

He says: “Investors could look at the cautious managed sector, which could include between 40 and 60 per cent bonds, or they could look at something like Credit Suisse&#39s target return fund, which aims to achieve a positive return at any point of the investment. That is your new equivalent of smoothing.”

Until now, funds have not been able to compete in terms of product wrappers in the same way as life office bonds. However, developments in open architecture and wrap technology, pioneered by companies such as Skandia and Winterthur, mean that similar-style wrappers will become available in the mutual market.

Close Fund Management is another company that believes the predicted demise of with-profits funds is opening the market for new investments.

Managing director Marc Gordon thinks the market is looking for an alternative investment which is transparent, smoothes returns and has some form of protection. He says: “Close has been offering this for nine years in the form of the UK escalator 95 and 100 funds – tried and tested vehicles which have successfully dealt with varying market conditions and investor concerns.”

Gordon says most investors accept that stockmarkets present the potential to produce far greater returns than deposit accounts but recent years have shown that returns can be volatile, investment timing is difficult and there can be long periods of significant loss. He says the popularity of the with-profits concept was due to the offer of capital protection together with an annual bonus but there are now other opportunities for investors that offer access, return, security and flexibility.

But while fund managers hail the arrival of a new breed of products as alternatives to with-profits, life offices argue that they already offer links to most of the best funds available through their own products.

Norwich Union funds development manager James Pearson says investors can gain access to 29 unit-linked funds within its life wrapper. He says: “We already offer a significant investment choice, offering external fund links from Gartmore to Merrill Lynch.

“What we are doing is trying to ensure that the funds are consistent and meet the needs of the consumer, which is why we are making our external fund links available on our life bonds. Eventually, the vast majority of these will be available on all our propositions.”

Prudential is launching a new-style life bond which is broadly aimed at meeting the criticisms levelled at conventional with-profits savings products. The new product will mirror the life fund&#39s asset mix but will have a different, formula-based smoothing process and no bonus rates or market value reduction.

Although Liverpool Victoria group sales director Mike Newton says it is hats off to Prudential for taking the with-profits debate another step forward, he does not believe it has found a viable solution for retirement saving.

He says, contrary to Pru&#39s research into IFA opinions on what savers want, his own company has found that consumers are less bothered about product structure and terminology as risk.

Newton agrees that IFAs want to see clearer product structures without MVRs and bonuses but he believes that risk is still the consumer&#39s number-one priority. He says while stockmarkets continue to move sideways, people are looking for short-term investments with guarantees.

But Newton says Liverpool Victoria can still offer meaningful returns over a longer period. It currently offers a traditional with-profits growth bond, which has a 100 per cent capital guarantee valid on the 10th anniversary of the investment.

He says: “Clearly, if you are entering into a contract with an insurance company saying: &#39Sort me out for my retirement&#39, they will go away and invest in different assets, gearing everything up for 25 years time. This is a very different type of philosophy to investing for a short period of time to guarantee the original sum.”

Newton accepts that the Equitable Life debacle has done serious damage to consumer confidence in life offices and says it is no wonder some investors are turning to mutual investments. But he reiterates that Equitable was a management failure and with-profits as a product cannot be classed as a failure.

Newton believes consumers will eventually return to with-profits rather than opt for mutual funds. The battle lines are set for medium-term sav-ers&#39 money.


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