A flicker of optimism for the fall guys of investment

Some funds are improving their performance and bonuses look secure, finds Cherry Reynard. So should you rethink if you're heading for the exit?

With-profits funds have had a bad name for a long time. They were supposed to navigate the ups and downs of stock market investment performance by holding back money made in good years so it could be paid out in bad ones – the so-called "smoothing effect". However, the concept did not stand up to the market storm that followed the bursting of the dot-com bubble at the turn of the millennium, with many providers cutting bonuses to the bone and imposing a "market value adjuster" (MVA) – in effect, a pen-alty for selling up.

But in the wake of nearly five years of market growth, are with-profits worth looking at again, even just holding on to? Or are they, as one expert puts it, products "past their sell-by date"?

The next few weeks should provide some clues. It is with-profits season, when providers announce their annual bonuses – that is, the amount of cash they will pay into investors' funds, akin to interest on a savings account. Sadly, with-profits watchers suggest they are not going to pull up any trees.

"We are likely to see flat performance figures for the funds as it has been a mixed year for the constituent parts," says David Carrington, sales and marketing director at Policy Plus, which trades endowments. "The commercial property market is uncertain, the bond market has seen falls and the equity market is only up 3 per cent."

But he adds that bonus cuts are unlikely as pro- viders have used some of the money gained from market growth between 2003 and 2006 to rebuild reserves. That will allow them to continue to pay bonuses even during a year when the underlying investments have not done well.

So in the light of this, should investors give with-profits another chance? Again the answer is far from clear. Looking at the long- term returns, with-profits can be seen to have held their own against some of the riskier stock market investments. Transparency has also improved, with providers giving investors more data on performance.

Ned Cazalet, principal of Cazalet Consulting, says many investors who may consider bailing out should sit tight: "A lot of money has been flowing out of with-profits that shouldn't be leaving. Just because an annual bonus is zero doesn't mean you shouldn't keep paying in, as the guarantees [such as the set payment at the end of the policy's life] can be very generous."

Crucially, though, performance varies across the sector. The more successful funds tend to invest heavily in shares, which have done well since 2003. Mr Carrington lists Prudential, Aviva (which includes Norwich Union), Scottish Widows, Clerical Medical and L&G as examples of funds well placed for growth in the years to come.

But some funds are simply weak. These are the ones that have been forced to hold lower-risk assets such as corporate bonds to meet guarantees made to investors, and have therefore not benefited from the rising stock market.

As a result, some experts want to call time on with-profits. "It is an historic product and past its sell-by date," says Bruce Wilson, managing director of financial adviser Helm Godfrey. "The returns looked smooth until people wanted to cash them in and MVAs were applied. Really smooth returns are hard to achieve."

Sheriar Bradbury, managing director of financial planner Bradbury Hamilton, says investors considering a move away from with-profits should look at the track record of the fund in paying both annual and terminal bonuses.

More importantly, they should look at the split of assets. A low weighting towards shares may be suitable in the current difficult markets, but is unlikely to serve investors well in the long term.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
The eyes have it: Kate Bush
music
Arts and Entertainment
booksNovelist takes aim at Orwell's rules for writing plain English
Arts and Entertainment
Al Pacino in ‘The Humbling’, as an ageing actor
filmHam among the brilliance as actor premieres two films at festival
News
Fifi Trixibelle Geldof with her mother, Paula Yates, in 1985
people
PROMOTED VIDEO
Sport
Mario Balotelli in action during his Liverpool debut
football ...but he can't get on the scoresheet in impressive debut
Environment
Pigeons have been found with traces of cocaine and painkillers in their system
environmentCan species be 'de-extincted'?
Arts and Entertainment
booksExclusive extract from Howard Jacobson’s acclaimed new novel
News
i100
Arts and Entertainment
A Pilgrim’s Progress is described by its publisher as “the one-and-only definitive record” of David Hockney's life and works
people
Sport
Loic Remy signs for Chelsea
footballBlues wrap up deal on the eve of the transfer window
News
i100
Arts and Entertainment
Art
Arts and Entertainment
Elizabeth McGovern as Cora, Countess of Grantham and Richard E Grant as Simon Bricker
TV
Life and Style
Instagram daredevils get thousands of followers
techMeet the daredevil photographers redefining urban exploration with death-defying stunts
Arts and Entertainment
Diana Beard, nicknamed by the press as 'Dirty Diana'
TVDaughter says contestant was manipulated 'to boost ratings'
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    C# .NET Developer (PHP, Ruby, Open Source, Blogs)

    £40000 - £70000 per annum + Bonus+Benefits+Package: Harrington Starr: C# .NET ...

    Data Analyst/Developer (Good education, Data mining, modelling,

    £40000 - £70000 per annum + benefits+bonus+package: Harrington Starr: Data Ana...

    Law Costs

    Highly Attractive Salary: Austen Lloyd: BRISTOL - This is a very unusual law c...

    Network Engineer (CCNP, CCNA, Linux, OSPF, BGP, Multicast, WAN)

    £35000 per annum: Harrington Starr: Network Engineer (CCNP, CCNA, Linux, OSPF,...

    Day In a Page

    Alexander Fury: The designer names to look for at fashion week this season

    The big names to look for this fashion week

    This week, designers begin to show their spring 2015 collections in New York
    Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

    'I like Orwell's writing as much as the next talented mediocrity'

    Will Self takes aim at Orwell's rules for writing plain English
    Meet Afghanistan's middle-class paint-ballers

    Meet Afghanistan's middle-class paint-ballers

    Toy guns proving a popular diversion in a country flooded with the real thing
    Al Pacino wows Venice

    Al Pacino wows Venice

    Ham among the brilliance as actor premieres two films at festival
    Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

    Neil Lawson Baker interview

    ‘I’ve gained so much from art. It’s only right to give something back’.
    The other Mugabe who is lining up for the Zimbabwean presidency

    The other Mugabe who is lining up for the Zimbabwean presidency

    Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
    The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

    The model for a gadget launch

    Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
    Alice Roberts: She's done pretty well, for a boffin without a beard

    She's done pretty well, for a boffin without a beard

    Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
    Get well soon, Joan Rivers - an inspiration, whether she likes it or not

    Get well soon, Joan Rivers

    She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
    Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

    A fresh take on an old foe

    Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
    Fashion walks away from the celebrity runway show

    Fashion walks away from the celebrity runway show

    As the collections start, fashion editor Alexander Fury finds video and the internet are proving more attractive
    Meet the stars of TV's Wolf Hall... and it's not the cast of the Tudor trilogy

    Meet the stars of TV's Wolf Hall...

    ... and it's not the cast of the Tudor trilogy
    Weekend at the Asylum: Europe's biggest steampunk convention heads to Lincoln

    Europe's biggest steampunk convention

    Jake Wallis Simons discovers how Victorian ray guns and the martial art of biscuit dunking are precisely what the 21st century needs
    Don't swallow the tripe – a user's guide to weasel words

    Don't swallow the tripe – a user's guide to weasel words

    Lying is dangerous and unnecessary. A new book explains the strategies needed to avoid it. John Rentoul on the art of 'uncommunication'
    Daddy, who was Richard Attenborough? Was the beloved thespian the last of the cross-generation stars?

    Daddy, who was Richard Attenborough?

    The atomisation of culture means that few of those we regard as stars are universally loved any more, says DJ Taylor