How with-profits Fund Management Can Diminsh Returns

Aviva announced on 12th January 2010 that their With-Profits Life Fund had returned 6% for the year 2009. Better than both cash and a poke in the eye. But could it have been better?

Aviva's Cautious Managed Life Fund returned 10% in 2009 and the Aviva Distribution Life Fund returned 20%. By comparison, these two funds, with an investment profile suitable for cautious to moderate investors such as those in with-profits funds, had performed so much better. How come?

When the value of the investments in a with-profits fund start to fall the liabilities don't. The comfortable gap between the value of the assets and the value of the liabilities starts to reduce. Neither the company nor the Financial Services Authority want to see the assets fall to a dangerous level where another Equitable Life is on the cards and so the insurance company starts to sell some of the investments that are most likely to see this sorry event occur. As a result, the company starts selling company shares when they are already cheap.

This risk starts to reduce when investment markets recover. At this point, the company can feel the relief and start increasing the exposure to shares again. By this time, the shares are more expensive and policyholders have missed out for good.

The fact that insurance companies worry about their liabilities in this way is fine if you have a policy with valuable guarantees. You're part of the reason they take this action to protect these guarantees. But if your policy doesn't have a valuable guarantee then you've simply missed out compared to where you might have invested.

Policyholders who are worried about their with-profits fund should seek independent financial advice and ask for an assessment of the guarantees. Any advice you receive which has not quantified the guarantees for you should be called into question.

We've produced a video to help explain this blog article at Fraser Heath Financial Advice News.

For more information about our service, please visit www.withprofitshealthcheck.com and for a with-profits health check, please contact me.