I REMEMBER a cartoon in one of the financial papers in the mid 1980s when the financial world was bouncing off the walls. It said: “So the junk bonds I sold you turned out to be junk, so what?”
Amazingly, and at last, the world has come tumbling down for my old lack of favourite, the with-profit bond.
I’ll repeat my comments from 15 years ago: They were a triumph of marketing and misinformation over correct data - much like every politician I have had the pleasure of not meeting.
Of most recent note is the sticky PruFund. Its inflows have plummeted 93.8 per cent, citing distribution of its product as the problem. They are simply marketing.
It’s sold as a smoothing exercise. Chip fat on your hair is also smooth. Any fund can smooth out returns when they are rising, but it’s when that good old tide goes out in winter that you find out a few things about your swimmers.
When the smoothing was needed, the fund resulted in immediate downward unit price adjustments. Its cautious fund was repriced by -9.8 per cent. A cautious fund that should have been shoring up at least a wetsuit for protection during the booming years.
Missing the point, they have stated the PruFund range will catch up with competitors when face to face advice can return. Long sigh. They have referred to it as an ‘advised product’ and it needs face to face advice. I believe it to be a ‘sales product’ not and advice product, and here I’ll repeat why.
When you invest your money into a pension or investment, a fund manager achieves the best return based on several factors. They spread your money across cash, property, bonds equities etc. There is great skill in knowing how much money to have in each sector and which bonds/equities to buy.
They then regularly rebalance that to achieve the best returns.
Over 20 years ago, we made the point that a life office does not have those requisite skills.
Large ‘Titanic style’ funds like those wouldn’t even be nimble enough to miss an iceberg if they knew about it before they left the port.
And so you or your adviser should choose the correct analysts to get the asset allocation (spread between stocks and bonds, property etc) correct and then the very best individual managers for those property, bonds, UK or any other overseas equities. That makes the same basic sense today as it did back then.
With-profit bonds/pensions operate differently. They decide to keep back some returns so when things are bad, they can give you some of what they kept back (like your parents did when they didn’t think you could handle your holiday money).
In reality, they can’t outperform a straightforward managed fund invested into exactly the same assets, so they are simply playing with accounting with your money. Better that you leave it to the very best managers for each sector and fully understand risk and reward, so you aren’t fooled by a placebo fund.
To protect their gambles with your ‘holiday money’, with profits also changed how to pay bonuses.
‘Reversionary’ bonuses are added each year and can’t be taken away, and ‘terminal’ bonuses are given at the end, but you won’t know what you are getting until the end and it might be nothing.
No surprise then, that they moved to terminal bonuses. Moreover, they can readjust unit prices or market value adjustments to downplay the value to suit what it really is worth, rendering the marketing word ‘smoothing’ as meaningless marketing twaddle.
Did I forget to state they pay basic rate tax within the fund as they grow, and you can’t use very generous available annual capital gains allowances each year to minimise the tax?
If you have such a fund, ask an adviser who is independent of commissions and allegiances to any organisations to review the fund at your earliest opportunity.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a complimentary review of any investments call 01872 222422, email info@wwfp.net or click on www.wwfp.net.
