The case for smoothing in 2020
One of the great strengths of with-profits investments is their ability to “smooth” out some of the highs and lows of market performance. This mitigates some of the volatility that accompanies stock market investing and, for example, reduces the impact of downward spikes on investors who are taking withdrawals from their funds.
As 2020 gets underway stock markets have proved, at the time of writing, relatively resilient. However, flat UK growth and a slowing global economy have the potential to combine with ongoing uncertainties around the UK’s post-Brexit trading arrangements to deliver a rockier ride as the year progresses.
This potential for volatility helps make the case for smoothing for more cautious investors. Another factor also makes with-profits funds attractive in the current climate: interest rates on cash deposits.
The best rate offered by a Cash ISA at the time of writing was 1.7 per cent per year on a five-year deposit, with most banks and building societies offering significantly lower rates than this.
Earlier in January Santander announced that the interest rate on its market-leading 123 and Select accounts would be cut from 1.5 per cent to one per cent. Experience shows other banks are likely to follow suit.
The Bank of England, at its most recent rate-setting meeting, kept interest rates on hold at 0.75 per cent and indicated that, if the economic outlook worsened, it would consider a cut.
Inflation as measured by the consumer prices index was 1.4 per cent for the 12 months to December 2019. One thing is clear: cash is not going to provide a real-terms return for the foreseeable future.
What does this have to do with with-profits investing? While no investment is entirely risk-free, many of the with-profits products offered by Healthy Investment come with capital guarantees on certain anniversaries and on the death of the policyholder meaning that, although they are not cash, they share some its most attractive characteristics.
Our with-profits funds invest in a mix of government and corporate bonds and UK and global equities, with some exposure to commercial property. The asset allocation is actively managed to provide the potential for higher performance.
The with-profits model means we are able to provide valuable capital guarantees. While historically having outperformed cash savings rates the past, of course, is not a guide to future performance.
In terms of security, with-profits investments are actually better-protected than cash.
Healthy Investment maintains a high level of capital coverage to ensure it can always meet its obligations to policyholders. Policyholders also have the comfort that with-profits funds are covered by the Financial Services Compensation Scheme (FSCS) up to 100 per cent of the value of their investment, without limit – unlike cash savings, compensation for which is limited to £85,000 per individual, per institution.
This means that, in 2020, the right with-profits funds can provide an attractive alternative either for cautious stock market investors or for savers who do not wish to see their capital eroded by inflation. In uncertain times with-profits could be just the investment clients are looking for.
This article is for authorised financial advisers only. It is not for use with clients.