“Our analysis shows that when markets are strong With Profits Bonds hold back returns so that when times are bad they can pay out more than they are actually worth” explained Miles Hendy, a Chartered Financial Planner at withprofitshealthcheck.com.
“This ‘smoothing’ primarily benefits those investors who cash-in their investment and the windfall they receive ultimately means less profits to share amongst those investors who stay invested and who have effectively subsidised the extra payout. It may feel counter-intuitive, but in the world of With Profits Bonds, a strong market downturn is a good time to take profits”Fraser Heath Financial Management, the Bristol based Independent Financial Adviser that operates the withprofitshealthcheck.com website, analysed the past performance of five of the UK’s leading providers of With Profits Bonds and Distribution Bonds. When they averaged the overall mix of shares, property, bonds and cash held in the companies’ funds it was clear that there was little difference between the two types of investment product. With the same mix of assets and the same fund managers, this seemed to be a fair way to see exactly how well the With Profits Bonds were smoothing returns.
On 1st November 2007, despite the onset of the credit crunch, investments had been enjoying strong returns for over four years. The average return of the Distribution Bonds was higher than the With Profits Bonds over 1 year (by 5%), 3 years (by 7%), 5 years (by 11%) and 10 years (by 19.5%).
However, by 1st November 2008 investments had taken an almighty hammering and this turned the results upside down. This time the average return of the With Profits Bonds was higher than the Distribution Bonds over 1 year (by 6%), 3 years (by 9%), 5 years (by 16%) and 10 years (by 4%).
While the design of With Profits Bonds means that they should continue to hold back some returns in periods of strong growth and subsidise returns after a market correction, please note that the figures above refer to the past and that past performance is not a reliable indicator of future results.
“A ‘Smooth Operator’ could get the benefit of the extra payout available for surrendering their With Profits Bond when markets are low, re-invest in an alternative investment with a similar asset mix, and might consider buying another With Profits Bond when investment markets have recovered.” Miles explained.
Fraser Heath advise investors who are considering asking for their money back to consult an Independent Financial Adviser before doing so and would like to stress that this press release should in no way be considered a recommendation to sell.
Our withprofitshealthcheck.com website has a 32 page on-line guide to help investors make a decision about how to take full advantage of their With Profits Bond. We would be pleased to offer Independent Financial Advice to clients who contact us.
Markets were strong in November 2007 and Distribution Bonds pay back more to investors than those in With Profits Bonds:
But times are bad in November 2008 when the value of With Profits Bonds fall but protect investors more than those in Distribution Bonds:
For more details please visit www.withprofitshealthcheck.com
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