Michael Deakin shares his insight into the workings of the CMI offshore with-profits fund
The Clerical Medical International (CMI) offshore with-profits fund was launched in February 1998 and is managed by Michael Deakin, chief investment officer at Insight Investment.
The CMI Global Investor The Privilege Account Initial is a single premium, whole of life assurance policy and is open to UK and overseas investors. It is domiciled in the Isle of Man.
Since its launch the asset allocation breakdown has not changed and the fund has been 70% invested in equities.
Sectors include property as well as company shares because over longer periods, shares and property tend to produce better returns, according to Deakin.
Companies that have remained in the portfolio over the past couple years include Vodafone Group, Glaxo Smith-Kline and HSBC Holdings.
The remainder of the fund is made up of eurobonds and cash. By law the portfolio is required to hold 80% of it in the currency it uses.
The investment strategy for the portfolio looks at three main factors. First, the technical position of markets such as whether there are more buyers than sellers. Second, the economic and political factors such as growth, inflation and interest rate outlook. Third, valuation of the market on a historical perspective and how one market compares to another.
The structure of the Privilege Account also contributes to the performance of the fund and what the bonuses will be for investors. CMI shares out the performance of the offshore with-profits fund to its investors through a system of bonuses.
The bonuses of the fund have gone down since its inception. In 1998 it was 7%, in 1999 it went down to 6%, in 2000 and 2001 it went down to 5.5% and in 2002 it fell to 4.5%.
Smoothing has been used in the portfolio to reduce the effects of the fluctuations of the stock market.
Bonus payments provide a smoothing effect and avoid the short-term peaks and troughs usually associated with a stock market investment, reducing the effect of fluctuations in value.
There are two types of bonuses in the offshore with-profits fund.
First, a regular bonus called 'bonus interest' that increases the value of the investment over time. CMI decides the rate once a year, but can change it mid-year if investment conditions change significantly.
This is added to the investors' investment by increasing the value of the units they have in the fund throughout the coming year.
The second is a possible final bonus, called 'terminal bonus', that the company adds when money is taken out of the offshore with-profits fund. This can be reviewed twice a year, but can change at short notice if investment conditions change significantly.
Annual bonus rates are decided through a long-term view of future economic conditions and the resulting investment returns.
If, looking ahead, the team expects investment returns to fall, bonus rates are reduced each year to bring it in line with expectations, even if actual returns in recent years have been higher.
The bonus rate also takes account of tax and is net of the annual management charge.
Terminal bonuses are reviewed every six months, but can be changed at short notice if investment conditions change significantly.
The difference in bonus rates throughout the years has been due to market volatility.
Another major determinant of whether or not a company can pay its investors bonuses is the free asset ratio. Free assets are the difference between a company's total assets and its liabilities, both with-profits and other policies.
At the end of 2000, the company's free asset ratio was 23%. This means that the free assets of the company were at more than six times the minimum level required by the regulatory authorities.
CMI has a substantial financial strength rating by Standard & Poor's.
It also has a five star rating from AKG, which assesses companies' ability to support their with-profits business over the long term and their likely future performance.
Financial strength is critical when there are times of stock market volatility.
For example, in 2000 and 2001, the UK stock market (FTSE 100) recorded two consecutive years of market falls (-10% in 2000 and -16% in 2001). After 11 September any recovery in the stock market was pushed back further.
about the manager: Michael Deakin
Michael Deakin joined Clerical Medical in 1974 after graduating in mathematics from Bristol University. After three years in the actuarial department, he transferred to the investment department in 1977. Deakin was appointed a fixed interest fund manager in 1981, and from 1987 to 1994, was head of fixed interest. He was appointed general manager, investments, for Clerical Medical in April 1995, with overall responsibility for the group's investment and asset allocation decisions.
Deakin has also been actively involved in the ABI Investment Committee, has represented the committee at a number of meetings with government agencies, and is currently a member of the committee's executive panel.
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