“All In It Together” – Why With Profits Funds Have And Continue To Weather The Test Of Time
15.08.2018 by Jim Ker
With Profits funds are a well-known concept but are they still relevant to modern financial circumstances? Nowadays, words like investment or investing are very commonly paired with words like risk and loss. Unfortunately, major market upheavals in the not too distant past have left many with weary assumptions about investing into the stock market and it’s understandable why – market volatility and an unpredictable political future can put off potential investors making a commitment with their savings. However, for those who are considering investing, but are concerned for the future, there are some investment products that have stood the test of time.
What is a With Profits fund?
The aim of a With Profits fund is to provide a consistent annual return, whilst minimising the ups and downs of the stock market. It achieves this by pooling together all the money paid into the fund and invests it across a range of different assets such as shares, property, Government bonds, corporate bonds and cash.
The goal is to reduce the risk of the fund by diversifying across different assets, whilst generating a steady return. In addition to this, a concept known as Smoothing is applied. Smoothing holds back some of the fund’s returns in a good year, which then can be used to increase bonuses in years that may not be as successful. Using the above techniques, a With Profits fund provides a more consistent return on your long-term investment than a standard stock market-based fund. You can learn more about how we invest our With Profits fund by viewing our Product Performance page here.
A Tarnished Reputation?
With Profits funds were primarily used by all life insurance companies during the 1980s and 90s. However, following the endowment mis-selling scandal – where many people were promised unrealistic returns, by overzealous salesmen – With Profits fell out of favour with advisers and the general public, leading to a number of companies closing their funds to new business.
This has resulted in some With Profits funds being slowly managed down over time rather than developing a portfolio for growth. Yet the modern With Profits fund manager looks past this bleak history and can work to provide savers with an option to invest without the fear of suffering stock market mishaps.
A Robust Concept in Volatile Markets
Despite a no thrills outlook for some closed With Profits funds, those open for new business are offering consistent returns and delivering on this alongside reduced investment risks. Once again, many people are beginning to appreciate the option to weather unpredictable markets with the chance of better returns than cash accounts.
With many savings and investment providers falling victim to the test of time and not keeping up to date with the demands of the sector, both in terms of regulations and performance expertise, it’s reassuring to see that the stronger survivors of the With Profits concept are able to reinvent themselves to continue offering an investment fund that puts a customer’s best interests first and offers a long-term performance that warrants attention.