Portfolio bonds are evolving into fund supermarkets which offers clients the opportunity to invest in a vast selection of assets under one insurance umbrella, writes Anusha Roy
Portfolio bonds are developing into the fund supermarket of the high net worth individual. With the intricacies of offshore products in the market, portfolio bonds offer the client the opportunity to invest in a wide range of assets, all under one insurance umbrella. As the offshore life office issues these bonds, investors are able to take advantage of the tax benefits of an offshore life assurance policy. However, with the increased activity of the offshore industry and the copious supply of portfolio bonds in the market, the infrastructure of the offshore industry is being questioned. Good providers will have to show a satisfactory level of service and transparency.
Michael Quinn, marketing manager at Norwich Union International, says: 'The offshore market is getting very busy: 10 years ago, there were only 12 names in the industry, now there are 25 names in the bond market alone. Investment bonds and portfolio bonds are two ways of cutting into the market and they are potential growth sectors as well.'
David McLean, head of marketing at Irish Life International, believes the potential growth of the portfolio bond industry is phenomenal. 'The product offers flexibility and added security to investors. Say an investor likes the fund of a particular provider but not the provider itself, they can decide to create a wrapper under another company. The more aware investors become of the investment arena, the more portfolio bonds become part of the process.'
Despite such expansion, Quinn thinks the offshore market has not undergone the same structural developments as the onshore market. According to Quinn, the industry lacks transparency and the information service of the industry is slow and mediocre. 'Although there are a lot of choices for investors, the service and framework of individual providers needs to be considered,' says Quinn.
Neither does everyone from the industry support the provision of a wide choice of funds from which the investor can select within a portfolio bond. The argument is that investors are engulfed in a profusion of choices that causes disarray. Quinn says that because of the wide range of offshore funds available in some bonds, investors prefer to choose from a smaller, more reliable pool of funds. 'Overall, the philosophy of Norwich Union is that we will select quality funds that will generate performance,' says Quinn.
While Richard Marshall, international development manager at Scottish Widows, recognises that total freedom of choice has its setbacks, he argues it offers flexibility to the client. He also supports the backing of a reliable institution and the advice of independent financial advisers (IFAs).
'The problem with freedom of choice is that, although it offers more flexibility, it may carry increased costs. If the market is reversing or standing still as it is now, the cost may be substantial. Small investors should first find out what the implications of investing in a particular bond are,' says Marshall.
Chris Holland, communications manager at Royal & SunAlliance, argues that the portfolio bond market is characterised by sophisticated and experienced investors who are looking for a degree of flexibility at the expense of higher costs. The market is not dominated by first-time investors, but rather by high net worth individuals.
Holland thinks that in order to keep a competitive edge in a growing industry characterised by many players, a provider should get the basics right. This means the product, the fund range and the commissions should be appropriate for the market that it is aimed at. McLean, on the other hand, attributes the key success factors of Irish Life as its ability and experience in multi-manager funds and the ability to tailor make products.
In order to provide more flexibility and an all round choice to investors, Royal & SunAlliance is one of the few portfolio bond providers along with Irish Life International that provides hedge funds in its International Investment Account. The company refers clients to IFAs for investment advice, however, it can also provide discretionary management.
Scottish Widows does not offer any peripheral services with the Scottish Widows Private Portfolio Bond. 'It is the policy of Scottish Widows not to offer any discretionary management or advice to clients. We believe that portfolio bonds serve the top end of the market and predominantly aim at high net worth individuals who would use the services of an independent adviser,' says Marshall.
Reverting to the transparency of information on the offshore market, Quinn says, 'Getting information on products is a nightmare in the offshore market. Even though a client will get a summary figure in terms of the charges, the Reduction in Yield (RIY) is not calculated on a standard basis throughout the industry. Therefore, investors do not get a clear idea of what they are getting back. Moreover, the providers in the market will promote the wrapper that they offer but not necessarily the virtues of the underlying funds. Hence at Norwich Union, we use Standard & Poor's qualitative and quantitative screening that ensures performance. After three years, the probability of getting better returns increases from 50% to 70%. We also charge only annual management fees negotiated with the 17 fund providers of the bond.'
Marshall also thinks that quality administration and transparency are key success factors of the industry. While commenting on the transparency of charges he says, 'Our charges are PIA regulated. Clients know the total cost of the product they are investing in and the charges quoted include the charges of the underlying funds. Moreover the administrative service provided is of high quality, switching between funds, for example, is effected on the same day the client contacts us.'
In the same light, providers have strengthened their information systems through providing online information on products and in some cases setting up a system allowing online transactions. Royal & SunAlliance has developed their website to include an array of information ranging from product and brochure information to an intermediary site.
Similarly, Norwich Union has focused special attention on developing an efficient support system and an online service that gives the client a pin number with which he can access fund fact sheets, get daily evaluations and enjoy an instant switching facility.
Irish Life International also provides detailed literature on products and charges through their websites. The www.irishlifeintl.com site provides general details on products, while the www.ili-maestro.com site is a premium discretionary portfolio service that allows the investor to get specific product information and online valuation.
Portfolio bonds offered by different providers tend to have some minor differences from one to the other. Bonds normally available to UK residents would offer the investor a choice of investing into a pooled asset: this is to preserve the tax advantages to the investor. Those available to UK expatriates or international investors will offer the investor the freedom to invest in any asset quoted on the world's stock markets.
The Norwich Union International Investment Bond allows the investor the choice of investing in a pool of 20 funds, of which 17 are in-house funds. The Norwich Union International Bond, meanwhile, permits the investor to invest in up to 20 funds from a range of over 90 international funds. With minimum investments of £10,000 and £50,000 respectively, the bonds are aimed at high net worth UK residents. The bond promotes funds that are at least 'A' rated from Standard & Poor's as part of the quality control process.
Scottish Widows International Private Portfolio Bond, on the other hand, allows investors the choice of investing into a pooled portfolio, aimed at UK residents, and a personal portfolio, which gives complete access to any asset quoted on the world's major markets. Based in Jersey, investment in the bond would mean that there are no tax liabilities except for tax on dividends in some countries. Although there is no management charge, an establishment charge of 9.5% applies and the client will also be subject to dealing and valuation charges.
Royal & SunAlliance, on the other hand, caters for every market. It offers portfolio bonds that invest in any real assets, pooled products and in-house products. The International Portfolio Bond aimed at the UK expatriate market, is a tailor-made product which offers the investor the ability to invest in any real asset quoted on the world's stock markets. The Managed Portfolio Account allows the investor to select from a range of international pooled funds. The Elite Investment Account and the International Investment Account give the investor the opportunity to invest in the 18 mirror funds of Royal & SunAlliance.
A single premium life insurance product, the Irish Life International Investor Bond provides the investor with the choice of investing in 37 internal funds available with a range of different risk and currency profiles among which are managed, cash, bond, tech, Japanese equity and US growth specialist funds. The funds are based on a multi-manager investment approach using the Multi Adviser Performance System (MAPS). With a minimum investment of £20,000, it is available to both UK residents and international investors.
As the offshore life office issues the bonds, investors can take advantage of tax benefits of an offshore life assurance policy.
The offshore market has expanded rapidly over the last 10 years.
The increase in minimum AE contributions has had little impact on opt-out rates - with cessations after April increasing by less than two percentage points, data from The Pensions Regulator (TPR) shows.
Follows string of appointments
Follows acquisition of BlackRock's DC platform
‘In the know’
£116.8m of benefits received by customers