Do second-hand funds gather dust?

Is it still a good idea to buy and sell with-profits endowment policies on the Tep market?

Traded endowment policies (Teps) have historically been marketed and regarded as low-risk investments. But questions are being asked about the attractiveness of the £160m- to £202.2m-a-year Tep fund market after liquidity problems, falling bonus rates and the general disenchantment surrounding with-profits policies.

Traded endowment policies (Teps) have historically been marketed and regarded as low-risk investments. But questions are being asked about the attractiveness of the £160m- to £202.2m-a-year Tep fund market after liquidity problems, falling bonus rates and the general disenchantment surrounding with-profits policies.

The second-hand market in with-profits endowment policies is growing. Policyholders who want to cash them in are realising they will get a better price if they sell on the Tep market than if they surrender them to the issuer. Investors get a mid-term policy with attaching bonuses, which may give a good return with limited risk, and there is the added advantage that the fund manager makes the decisions.

But there have been problems. Last December, a prominent Tep fund, the £100m Secured Profits, suspended redemptions and subscriptions after investors withdrew 25 per cent of its assets over six months. Surrenda-Link, which manages the fund, proposes splitting it into the Restructured Secured Profits Fund and the Liquidation Pool. Shareholders have until Friday to inform the company which of the two they want their investment to go into.

The restructured fund will not allow redemptions for two years; thereafter, they will be limited to 20 per cent a year per investor for three years. Roger Lawrence, director of Shepherds (Financial), admits there are liquidity issues with Tep funds, although he is keen to stress that even equity funds have limits on the amount they can liquidate at one time.

Mr Lawrence says: "If a Tep fund has £50m, of which 25 per cent is invested in Standard Life policies, for example, it is very difficult to switch suddenly into other policies."

But this is not the only challenge facing Tep fund providers seeking to persuade people to invest in them. Alan Steel, managing director of Alan Steel Asset Management, is wary of Tep funds because their underlying investments are with-profits policies.

"I am unhappy about this investment because these funds cannot diversify and it is not an area that will provide much growth," he says. He adds that although investors in Tep funds benefited from the "crazy reversionary bonuses of 25 years ago, when life companies were trying to outbid each other, bonuses have since been falling... If they were invented today, with-profits policies would not get past the drawing board."

Brian Goldstein, managing director of Policy Portfolio, says that many of the problems encountered by Tep funds are caused by the way the fund is set up. He advises investors to look for funds which reduce volatility through high entrance fees, to discourage redemptions, and the imposition of penalties for taking your money out.

However, such measures are dismissed by Tep fund managers. Paul Sands, chief executive of Surrenda-Link, says: "People who invest in these funds need to be told they are relatively illiquid. They are low risk and provide steady returns, and therefore an investor should stay in them for a minimum of five years."

Tep fund managers stress these products are intended as an alternative to keeping money in bank accounts. While bonus rates may have fallen, so too have interest rates and interest earned on bank accounts.

Investors could consider holding Teps in personal portfolios rather than investing in funds. Such a portfolio will allow you to view the surrender values of individual policies, buy different policies and have greater control and flexibility over your investment.

But the trouble with this approach, says one Tep fund manager, is that to gain sufficient diversification in a portfolio at least 10 policies are required. "With a minimum investment of £10,000 in each policy," he says, "an investor needs at least £100,000 for a portfolio."

* Simon Hildrey is editor of 'International Financial Adviser'

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Life and Style
healthMeet the volunteer users helping to see if the banned drug can help cure depression and addiction
Arts and Entertainment
tvDick Clement and Ian La Frenais are back for the first time in a decade
Life and Style
tech
News
i100
News
Foo Fighters lead man Dave Grohl talks about the band's forthcoming HBO documentary series
people
News
i100
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

    Guru Careers: Pricing Analyst

    £30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

    Guru Careers: C# Project Team Lead

    £55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

    Day In a Page

    Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

    Health fears over school cancer jab

    Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
    Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

    'I forgive everyone, but I don't forget'

    Fifa president Sepp Blatter issues defiant warning to opponents
    Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

    Weather warning

    Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
    LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

    High hopes for LSD

    Meet the volunteer users helping to see if it cures depression and addiction
    Why the cost of parenting has become so expensive

    Why the cost of parenting has become so expensive

    Today's pre-school child costs £35,000, according to Aviva. And that's but the tip of an iceberg, says DJ Taylor
    Fifa corruption: The officials are caught in the web of US legal imperialism - where double standards don't get in the way

    Caught in the web of legal imperialism

    The Fifa officials ensnared by America's extraterritorial authority are only the latest examples of this fearsome power, says Rupert Cornwell
    Bruce Robinson: Creator of Withnail and I on his new book about Jack the Ripper

    'Jack the Ripper has accrued a heroic aura. But I'm going after the bastard'

    The deaths of London prostitutes are commonly pinned on a toff in a top hat. But Bruce Robinson, creator of Withnail and I, has a new theory about the killer's identity
    Fifa presidential election: What is the best way to see off Sepp Blatter and end this farce?

    Michael Calvin's Last Word

    What is the best way to see off Sepp Blatter and end this farce?
    Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

    Exclusive interview with Tripoli PM Khalifa al-Ghweil

    'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
    Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

    Raymond Chandler's Los Angeles

    How the author foretold the Californian water crisis
    Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

    Art attack

    Chinese artist who posted funny image of President Xi Jinping facing five years in prison
    Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

    Cher is the new face of Marc Jacobs

    Alexander Fury explains why designers are turning to august stars to front their lines
    Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

    'I'm climbing Ben Nevis for my daughter'

    Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
    10 best wedding gift ideas

    It's that time of year again... 10 best wedding gift ideas

    Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
    Paul Scholes column: With the Premier League over for another year, here are my end of season awards

    Paul Scholes column

    With the Premier League over for another year, here are my end of season awards