With-Profits Funds - How Investment Returns Can Be Diminished

With-Profits - How Returns can be Diminished Our Fraser Heath press release earlier this week highlighted the poor return of Aviva's with-profits fund in 2009. This new Fraser Heath video explains how the returns in a with-profits fund can be diminished due to concerns over financial strength. In broad terms, consider a with-profits fund as any other company with assets and liabilities. The assets are policyholders' money invested and the liabilities are the guaranteed values on all the policies. When the value of the assets start to fall (as they did preceding and after the credit crunch) a tipping point is reached. The fund manager realises that if asset values start to fall much further then the value of assets may go below the value of the liabilities. This is a problem that the company and the Financial Services Authority want to see avoided (see Equitable Life for details...) Consequently the with-profits company has to reduce the proportion of assets which are most likely to fall further in value; namely company shares. This can mean that with-profits companies sell shares cheaply and then buy them back when they are more expensive, creating a permanent financial loss. In 2009 Fraser Heath played close attention to Aviva's with-profits fund as we ran a website dedicated to helping policyholders decide how to vote on their reattribution payment (see www.reattribution.com). We also wanted to make Aviva with-profits bond policyholders approaching their 10th anniversary fully aware of the feature and to understand that carrying forward the no MVR guarantee could cost thousands of pounds. Knowing the fund particularly well we have been quick to assess how changes in the asset mix in 2009 have impacted on returns. The evidence is a stark reflection on how with-profits funds can diminish returns. Policyholders with valuable guarantees are the cause of these unfortunate asset allocation changes. If your policy has a valuable guarantee then perhaps this by-product of asset allocation changes is not of concern to you. But if your returns are being compromised because other people have valuable guarantees but you do not, then we can help you investigate whether your money could find a better home.