There has been much noise and criticism surrounding With-Profits over the last 12 months with many i...
There has been much noise and criticism surrounding With-Profits over the last 12 months with many investors reviewing their stance. We believe that such criticism is unjustified.
Taking a step back, the benefits of With-Profits soon become apparent especially when you take a look at the alternatives of direct investment in property, the level of exposure that comes in selecting one category of investment or the absence of smoothing offered by other investment mixes.
We should remember the facts of the matter when evaluating the performance of With-Profit Bonds:
In terms of pushing back those criticising the With-Profits investment philosophy, we seem to have forgotten what a dreadful investment climate we all have experienced and how the carefully saved money of the typical Pru customer would have been eroded in almost any other collective investment.
Let's turn to the facts. The average maturing 10 year With-Profits policy has yielded almost twice the average return of a deposit account and four times that of a unit trust. On average, With-Profits bonds have delivered a return of 6.4% per annum to August of last year compared with 1.5% for a unit trust¹
Insurance industry analyst, Ned Cazalet, recently commented:
"With profits policyholders with the stronger and more foresighted life companies have done relatively rather better than they might imagine over the past few years, benefiting on two counts. Firstly, from the asset diversification within with profits funds, that has proved to be a much better strategy than undiluted direct exposure to volatile equity markets and secondly, from the smoothing of fund returns, which has seen policy values enjoying some degree of insulation against the worst of poor underlying investment conditions."
Yet some With-Profits funds are more equal than others. Those knocking tend to group all providers together, even though the funds which support these products vary enormously in their approach to financial management, and most importantly, their investment strategy and financial strength. With financial strength comes choice and the ability to select a desired asset mix. Reduced financial strength removes the ability and flexibility to make such investment choices.
IFAs understand this well. A financially strong fund is able to better withstand periods of poor stock market performance. A financially strong fund can also support bonuses through troubled times for longer, drawing on greater reserves.
Paradoxically, it is the tough markets that we are in at the moment that show the real strength of With-Profits. Looking at the returns and risks of other investment vehicles over the last few years it is clear that With-Profit investments stand relatively unscathed by these turbulent markets.
Past performance is not necessarily a guide to the future. Prudential is regulated by the Financial Services Authority. Full details of Prudential products are available on request.
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