You don’t have to put a great deal of thought into why Skandia might be so eager to highlight the 10 year anniversary MVR penalty free spot guarantees coming up on so many with-profits bonds. (page 18 of the FT’s Companies and Markets today). Skandia says as much as £8bn could move in the next few months. Ned Cazalet, a chap who has made a career about knowing a thing or two about with profits, is quoted as saying it could be much more.
We are approaching a decade since the 2000 bond boom period. I can remember misgivings voiced by many at the time about whether with-profits should be sold as a medium term investment at all. There were always dark mutterings about commission. Of course, those accusing advisers of bias, should remember that at the time there were plenty of unit linked alternatives. Maybe not as many as today, but of course, Skandia itself provided a whole host of fund choices in a bond structure. So whatever advisers’ motives over commission there was a genuinely held belief in with profits as an appropriate vehicle.
Indeed, there has been another mini-boom in the last year showing that despite many travails some investors and advisers are still buying into the smoothing argument. There is a definitely an argument in favour of funds run as well as say Prudential’s has been in the last decade or so.
Yet I personally have doubts about whether a with-profits investment that has to be all things to all sorts of investors, shareholders, actuaries and regulators isn’t always destined to be a thing of confusion. It will be a day of relief for the industry when the last endowment matures freeing advisers from the shadow of red and amber projection letters whatever the rights and wrongs of how this was handled.
However the series of bonds sold as pure or at least purish investments, ten years ago will tell us quite a bit about a changing industry.
A lot of new to newish advisers will want to move clients so that the money can be placed on to wraps and properly asset allocated – obviously with the taxman taken into account too.
Some may move simply because of poor or poorish performance – personally I wouldn’t be happy in a fund that has closed subsequently in the last ten years and they tend to be the funds with the most punishing MVRs. Clearly those that remain open believe they have a strong investment case and might argue that best advice is to stay put, though some policyholders may simply need the money.
But one thing worries me about this type of investment reflected in Ned Cazalet’s last comment in the story. “If you can win more than you can lose and do it on a sensible cost basis, there’s a lot to shoot for out there.” He is quite right of course and best advice is of course all an adviser should care about, but it doesn’t always sit easily with the strange collection of interests represented by a with-profits fund.
Although I have never been a fan of with profits I do have concerns about those who “jump ship” in the way that is almost a fashion statement. The words “properly asset allocated” give me the most concern. The inference is that it is possible to find the correct asset allocation for each client and that this allocaction showhow differs from that of the with profit fund in which they are currently invested. Investing in a fund made of cash, fixed Interest, property and Equity does make sense for many but I’m not convinced that setting different percentages is as important as the fact that each asset class is part of the mix. Diminishing marginal returns seems to be at work here. Although advisers and clients like to feel that they are in control there is a certain element of past performance allowing future predictions involved with such a view.
In an extreme case where a closed fund is almost all cash and fixed interest I can see the case for a young aggressive investor to switch ( begs the question why they bought a with profit bond in the first place) but in many cases of more balance holdings and with older more cautious clients I would be concerned about activity for its own sake ( an increasing problem with Advisers changing to fees) and ask whther the new asset allocation can be demonstrably shown to be superior to the original.