How to Buy a Past Performance

There are a couple of features of Prudential’s With Profits Bond which mean that if you understand how it operates, you can really work it to your advantage. I’ll write separately about the “£25,000 rule.” This article focuses on how your investment can travel back in time and effectively buy a past performance.

Firstly, every investor in a With Profits Bond needs to understand that your future returns are always based on the value you bought your investment. Sure, there’s an indicative rate of return based on the annual bonus rate, but to work out whether you are due a bit more than the annual bonus when you cash-in (due a terminal bonus) or a bit less (due a Market Value Reduction), the insurance company always refer to the growth in the with-profits fund based on the value when you bought it.

In the case of Prudential With Profits Bond, they average together all investors who buy in the same tax year*. This means that anyone who invests their money before 5th April 2010 will have the value of their investment pooled together with every other investor from 6th April 2009 to 5th April 2010.

On Friday 26th February 2010 Prudential announced a return in their With Profits life fund for 2009 of 15.7%. Based on the performance of equities and property in 2009, a year where the first quarter of 2009 was poor and where we have enjoyed strong and steady returns in the main asset classes in the with-profits fund from the second quarter of 2009 onwards, it would be reasonable to assume that this good return has mainly be enjoyed by investors in the current tax year.

By timing your investment before the end of this tax year, you should be able to benefit by aggregating the value of the assets you bought in the fund with those who bought assets when they were much cheaper. Calculating the gain you would make requires details of how much was invested each day and seeing how the asset mix was fixed on each day to work out so it’s not possible for me to do, but one might cautiously conclude that there are several percentage points head start to be had by investing now. It’s a rare case of effectively being able to buy a past performance.

*Please note that this article is not a recommendation to invest in Prudential’s With Profits Bond and we cannot be held responsible for any actions you take after reading it. The article aims to simply explain our understanding of how Prudential pool their investors for the purpose of assessing asset share for future terminal bonus (and market value reduction). We have checked our understanding with Prudential who have confirmed via email, but this description of pooling the With Profits Bond by tax years is not included within their Principles and Practice of Financial Management document. Prudential could change this practice. For a personal recommendation, please contact Fraser Heath Financial Management.