How with-profits funds help investors weather stormy markets

Even before COVID-19 arrived in the UK, volatility in the value of shares seems to have grown steadily in recent years. Much of this stems from the fact that financial markets are able to respond more quickly to worldwide events with the advent of high-frequency trading fuelled by 24-hour news and social media, and because sentiment seems to be changing more quickly than the British weather. 

In 2020, a perfect storm of coronavirus, a post-COVID recession, Brexit and the US elections are changing investor perceptions on a daily basis. Although the UK stock market grew 9% in Q2 2020, the market is still down 18% year-to-date (as at August 2020). 

For the average cautious investor the level of volatility in the market can be a major turn-off. The last time we saw such adverse conditions for investing back in 2008/2009, people turned to safe havens such as cash, government bonds and, yes, with-profits.

During the financial crisis of 2008/2009, many mutuals delivered record sales volumes. People saw mutuals and friendly societies as a safe pair of hands, and those customers for whom with-profits savings were appropriate valued the product’s ability to smooth out the peaks and troughs of the market.

The chart below, which is based on analysis of our Order Insurance With-Profits Fund (OIF), shows that over the period of 2015 Q4 to 2020 Q1,the Foresters OIF has outperformed the FTSE 100 index with significantly less volatility in returns (23.4% vs. FTSE 100 performance of -6.4%).

The chart demonstrates that the range of quarterly returns for the FTSE 100 is greater than that of the Order Insurance Fund, with significantly more downside risk. This of course means that a with-profits product offers a much more secure option for the cautious investor.

Why with-profits?

There are two main features of a with-profits product that allow for this more reliable performance: the allocation of bonuses and smoothing:

Annual bonuses

In a with-profits product, we aim to declare bonuses that are sustainable in the long term and which can add additional security to the value of the policy.

Smoothing

Smoothing means Foresters will set the rate of bonus by taking a long-term view, rather than simply reflecting the most recent performance of the underlying investments. Smoothing aims to reduce the direct impact of market changes on the fund investments and means that investors are less directly exposed to rises and falls in the value of their investments over the shorter-term.

There are other features of a with-profits product that help reduce volatility, which include:

  • With profits funds invest in a wide range of assets, including bonds, gilts and property, not just the equity markets, and that diversity helps balance market volatility.
  • When your plan pays out, Foresters may pay a final bonus in addition to the annual ones. Please note, in adverse investment conditions, we reserve the right to apply a market value reduction (sometimes referred to as a MVR), which will reduce the plan’s value.
  • The with-profits product may feature a guarantee, meaning that at the end of the term, or on death before maturity, a specified and guaranteed sum will be payable as a minimum.

What’s more, in absolute terms, with-profit policies invested with a mutual/friendly society insurer have, according to AFM research, provided investment returns much greater than an average unitised product with a similar structure. As a result, with-profits are particularly worth considering for investors with a set timeframe in mind or who have a long-term view, such as planning for retirement or paying for a child’s education, as the longer you hold the plan, the more potential there is to benefit from the more predictable and superior returns offered.

Greater transparency

People with a long memory may recall the concerns surrounding with-profits as a result of the mis-selling of mortgage endowments in the last century and the failure of Equitable Life in 2000.

However, since that time the degree of regulation has intensified significantly and with-profits providers now need to set aside enough money (capital) to cover all their liabilities (guarantees) as well as to allow for one-in-two hundred year events (which seem to be happening a bit too frequently lately). There is also a high level of transparency in the way the fund is managed and boards are subject to extensive governance requirements.

According to a report issued last year by the financial services regulator, the Financial Conduct Authority (FCA), at the end of 2017 there was around £247bn invested across 14m with-profits policies. Whilst this had fallen from a peak of over £400bn, as the FCA stated, it still represents a “significant portion of the long-term savings, pension and retirement income provisions of customers in the UK”.

It seems like we can expect further turbulence in the stock market over the coming months and investors will be wary about the prospects for their investments. By ensuring with-profits makes up part of your assets, you should be able to continue to enjoy growth when the markets are high and suffer less in the downturn.

With-profits truly is a fund for all seasons.

All of Foresters Friendly Society’s products invest in our with-profits fund.  Find out more about the full range of savings & investments products offered by Foresters Friendly Society.

The sixth with-profits survey by Barnett Waddingham, the UK’s leading independent provider of actuarial, administration and consultancy services, covered over £50bn of assets across 41 funds and 23 insurers for the period ending December 31, 2018.  The results showed that Foresters’ Order Insurance Fund (OIF) is performing well above average throughout a five-year investment period and ranks 5th best-performing fund overall. The fund is also best in class in its medium-sized fund category – funds containing £50-£200m.

In June 2019, Foresters Friendly Society was named Best Small Insurer at the Insurance Investment Exchange awards. Foresters were recognised for their work in delivering real value through their investment portfolios and minimising volatility in an increasingly complex environment. Embracing innovative strategies and internal talent has helped Foresters to be recognised for this award.

Past performance is no guide to future performance and the addition of bonuses is not guaranteed.

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