Looking out of my window this rainy morning it occurred to me that the bad weather appears to be the most reliable feature of the Great British summer.
This muse on reliability coincided neatly with my train of thought as I was, at the time, reading some recently published ABI statistics which show a dramatic drop in new distribution bond premiums in the first quarter of 2008 compared with the same period last year.
In terms of the possible reasons for this decline in distribution bond sales, increased market uncertainty in the second half of 2007 will certainly have had an impact. As distribution fund investors tend to sit at the lower end of the investment risk spectrum the credit squeeze/Northern Rock headlines may have had a disproportionately larger effect on this group, perhaps evidenced by an unwillingness to commit funds to the market in the latter part of 2007 and early part of 2008.
It is also likely that the Pre-Budget Report announcement of changes to capital gains tax (CGT), which inevitably created uncertainty about the merits of insurance bonds in general when compared with collective investments such as OEICs, will have had an impact and may well have been reflected in the drop in distribution bond premiums in Quarter 1 2008.
In practice, of course, the attraction of bonds versus collectives is very much an area of decision for each client based on their own tax positions. Clearly, each wrapper continues to have its place following the changes to CGT and our analysis of the relative tax positions of the different wrappers suggests strongly that the diversified asset mix offered by distribution bonds ensures their continuing viability from a tax perspective.
These statistics do, however, give some pause for thought and beg the question is there still a market for distribution bonds? Tax wrapper considerations aside, my instinct is that there is still a big market for distribution bonds going forward. In terms of delivering a multi-asset, risk-appropriate portfolio, distribution funds continue to offer investors looking for a lower risk strategy a convenient and administratively simple means of diversifying their asset allocation.
The distribution fund approach also has the advantage that the asset allocation will be largely self-balancing over time (assuming the fund objectives do not change). In fact, the long term success of the products has been down to sound investment management and in particular a consistent long term approach to asset allocation. Interestingly, demand for with-profits bonds has increased compared with Quarter 1 2007.
In view of the current climate of market uncertainty it is unsurprising to find heightened investor appetite for products that offer an element of downside protection. According to the ABI there was a big increase in demand for guaranteed bonds during 2007. Given its more recent history and perceived lack of transparency, one must wonder, however, if with-profits is the most suitable means of delivering the reductions in downside risk that today’s investors are seeking.
What does seem relatively certain is that, going forward, investment guarantees will be an area that is ripe for product innovation. That said, for those investors at the lower end of the risk spectrum who do not wish to incur the extra costs or restrictions of enjoying an investment guarantee, there remains significant market potential for distribution funds, particularly those which have a track record of providing reliably good long term returns.
Mark Wilkinson is head of development at AXA Wealth Management
The views expressed in this blog are those of the individual.IFAonline
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First mentioned in Cridland Report