What now, after with-profits?

By DAILY MAIL REPORTER
Updated:

 

BONUS cuts, shortfalls, regulators sniffing around - is it any wonder savers are steering clear of with-profits funds?

Sales of new with-profit bonds, the flagship savings product, fell from £10.3bn in 2002 to just £2.7bn last year, figures from the Association of British Insurers show.

But finding a similar investment is difficult. So what's the alternative?

A with-profits fund is a pooled investment fund run by an insurance company which traditionally invests in shares, bonds, property and cash. Returns to investors take the form of an annual bonus.

The main attraction is that some money made in the good times is supposed to be held back - a process called smoothing - so it can be paid out when conditions turn rough.

Unfortunately, the latest stock market downturn revealed that no investment, even with-profits funds, is immune from a crash.

Ryan Hughes, at independent financial adviser (IFA) Chartwell, says: 'There is no exact alternative to with-profits which has the plus points without the negatives.

'Some companies have tried to develop similar products but have had no luck.'

The advice of Patrick Connolly, of independent financial adviser John Scott & Partners, is for investors to go back to square one.

He says: 'You must not think 'Where is the best home for this £10,000?' You must look at your total savings and the amount of risk you are willing to take and work from there.'

Investors would then have to portion up their money between shares, bonds, property and cash depending on what is most appropriate to their own circumstances - and they might need to take advice from an independent professional.

Mr Hughes agrees that investors should reassess how heavily they are invested in shares.

He says: 'Most clients were only borderline suitable for with-profits funds anyway. They should be looking at guaranteed income bonds first, then corporate bond funds, and only after that shares funds, and only broad-based ones investing in large firms - nothing too exciting.'

Another option outside insurance firms, especially for small investments, is a managed fund, he adds. They are similar to with-profits except the majority don't have property and none carry out smoothing.

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Distribution funds, which tend to be 60% invested in bonds and 40% in shares and pay an annual income, also fall into this area.

Mr Hughes chooses distribution funds from Legal & General and Jupiter, and, for the managed option, Investec Cautious Managed.

At IFA Chase de Vere, Anna Bowes selects distribution funds from Invesco Perpetual and New Star, along with managed funds Gartmore Cautious Managed and Threadneedle Equity & Bond.

Investors who can go it alone should check out our model portfolios and recommended pooled funds in the table.

• CHRIS HALL, 44, started investing £80 a month in the Jupiter Distribution fund at the end of 2002. He made the investment to help pay off a potential mortgage endowment shortfall, rather than add more to the original policy.

Because the fund is invested in bonds as well as shares, Chris's investment has held up pretty well during the stock market downturn, and he is now breaking even.

Chris, a policeman from Plymouth, says: 'I chose this fund because I wanted a long-term, low to medium-risk investment. It's going on as I expected.'

How to balance your portfolio

CAUTIOUS INCOME INVESTOR
Cash - 20%
Bonds - 50%
Legal & General Fixed Interest 20%
Standard Life Select Income 20%
M&G High Yield Corporate Bond 10%
Commercial property - 10%
Norwich Union Property 10%
UK shares - 20
Artemis Income 10%
Credit Suisse Income 10%

CAUTIOUS GROWTH INVESTOR
Cash - 20%
Bonds - 40%
Legal & General Fixed Interest 20%
M&G High Yield Corporate Bond 20%
Commercial Property - 15%
Norwich Union Property 15%
UK shares - 25%
Cazenove UK Growth & Income 10%
Lazard UK Alpha 10%
Schroder UK Alpha Plus 5%

Source: Chartwell

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