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Why with-profits model is past its sell-by date

Who can beat the returns from With-profits?

Although I must have missed Brian Newbold&#39s article on the smoothing of withprofits funds (Money Marketing, August 30), I am familiar with his views.

Terence O&#39Halloran is quite right to defend the past performance of withprofits funds. However, like the rest of the investment industry, their limited research seems to begin and end with past performance and only then after being particularly selective.

It could be argued that, with the biggest proportion of with-profits funds assets invested in equities during the period of the best-ever bull market in the UK and inter-national equities in history, returns should have been even better or huge reserves should have been built up.

The fact is that the era of the with-profits model is past its sell-by date. The markets have changed. The products have changed. The customers have changed.

The marketing departments have twisted the arms of the actuaries to invest more and more of the funds&#39 assets into equities.

If the stockmarket correction turns out, as I expect, to be a long drawnout bear market taking share prices down to levels we only see in our worst nightmares and remain so for a considerable number of years, then the effect on with-profits funds will be devastating.

With-profits bonds with their easy sell (low-risk, guarantees, past performance) and obscenely high comm-ission have been the best sellers for all the insurance companies who offer them.

I believe that up to £35bn has been invested in the last three years.

Assuming that the average with-profits fund has an exposure of 80 per cent in equities and the markets are down by 30 per cent, then according to my calculations 24 per cent of this sum is no longer available to policyholders.

In all investment decisions, it is not what has happened in the past but what will happen in the future. From this point of view, Sandler is absolutely right when he criticises the investment knowledge of financial advisers.

I suggest that it is a toss-up which will be the next misselling scandal.

The candidates are low-risk with-profits bonds, low-risk stockmarket-linked income bonds and low-risk zeros.

Roger Harris

Certified financial planner,

Roger Harris & Company,



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