In today's investment climate, investors are increasingly looking for asset protection. They wa...
In today's investment climate, investors are increasingly looking for asset protection. They want reassurance that the value of their assets will not fall. This is not altogether surprising in a bear market which is now into its third year and which has severely dented investor confidence.
Many endowment policies contain precisely the characteristics that investors are now seeking. This is because within an endowment policy, the sum assured and the bonuses together represent a minimum guarantee, as once these bonuses on that sum assured have been awarded, they are locked into the policy and cannot be taken away. Often the minimum guarantee is greater than the price paid by the investor and the premiums to be paid to maturity. This means that even if the life office were never again to declare a bonus until maturity, the investor's capital is protected. In these circumstances, the investor cannot lose money.
In addition, even when bonuses are reduced, the value of any policy continues to increase thereby increasing the value of the minimum guarantee. It is worth noting that, even when bonuses fall, policies continue to increase in value, albeit at a slower rate.
In a bear market environment, what other products are able to provide capital protection and yet also have the potential to deliver growth in a safe environment? There are not too many.
Many policies are extremely resilient even to deep cuts in annual bonuses. If bonuses were reduced by up to 50%, many would still yield returns of between 4% and 7%. For many policies it would take a reduction of 100% or more before the return fell to zero. For overseas investors, often there is no comparable investment locally that offers the same level of potential return with the same level of capital protection.
In recent years, the value of terminal bonuses paid at maturity has fallen and this has reduced their impact on the final return. Indeed, even if no terminal bonus were to be awarded, a significant number of policies could still achieve returns well in excess of the combined cost of the purchase price and the premiums to be paid to maturity.
Overseas investors continue to be attracted by the financial strength of UK life offices, many of which have AA ratings. A major benefit for overseas investors investing in UK policies is their ability to pay a lump sum to a UK market maker who will then hold the money in a ring-fenced client account and manage the premium payments on the investor's behalf.
Given the present economic climate, it is perhaps not surprising that the special characteristics and benefits of endowments are seen by investors as being particularly appropriate to investment in the current environment.
Brian Goldstein is the Chairman of the Association of Policy Market Makers and Managing Director of Policy Portfolio
Putting the tech into protection
Square Mile’s series of informal interviews
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Launching later in 2019
£80bn funds under calculation