31 January 2010

With Profits Policies - time to reconsider?

With profits policies were appropriate for many investors when they came along 10 - 12 years ago. They include a mix of asset types (shares, fixed interest, etc.) and are managed by the insurance company to "smooth" the ups and downs of investing.

The trouble is they have become synonymous for many people with an opaque investment which does the opposite of what you expect. It is up to the insurance company actuaries to decide on the annual bonus rate - the amount by which your investment increases - or the Market Value Reduction (MVR) - the amount by which it decreases (in effect). The way that the smoothing is done can mean that values are now going in the opposite direction to the stockmarket, since they take into account the average performance over a longer period of time.

Combining this with a more cautious approach to asset allocation than when a policy was bought (to protect the bonus pool) means that for many people it is time to get out. Having an MVR doesn't necessarily mean that it is the wrong time to sell, but it is worth checking if there is a time when your policy waives the MVR - this can happen on the 5th or 10th anniversaries, for example.

Having said that, there are still worthwhile With Profits policies out there.

3 January 2010

Investing in 2010

What are the prospects for investors in 2010? Remembering that this is not personal advice, here's a quick summary of some basic asset types.

Savings look set to be un-rewarding, with low interest rates set to stay for the time being. So apart from a minimal "rainy day fund" it is not worth keeping too much in a deposit account.


Corporate bonds were a big story in 2009 - certainly for the types of investor I deal with (in the cautious half of the scale). There still seems to be some mileage left, but I would hesitate to put new money into corporate bonds now. High yield bonds are following a similar path - just a step behind, and when we begin to see the end of Quantitative Easing their attraction will reduce further. The "strategic bond" category may be a safer bet with fund managers having the ability to switch between different types of fixed interest holding (corporate bond, high yield bonds, global bonds, gilts, etc.). Having said that, government gilts may have rough waters ahead with the end of QE (causing higher inflation, causing reduced value in gilts since their fixed interest rates become less attractive), and with doubts about the UK’s ongoing credit-worthiness.

Equities (shares) look very positive. Although the full effects of the recession have not yet been felt (when ARE the government going to be up-front about how our massive debt is going to be repaid?!) shares tend to recover early in the economic cycle. In particular (again, thinking of more cautious investors), equity income funds are a good story (if chosen well) since the dividend income introduces some stability if re-invested, and in the worst case reduces any loss in capital value.

For the more adventurous, Emerging Market funds continue to look good in terms of increasing valuations. Countries which were "third world" in the not-too-distant past are increasingly going to be the engine-house of the world economy in the not-too-distant future.

Property funds have been bad news in recent years, and some have been closed for withdrawals due to the difficulty there was in selling commercial property to provide the liquidity. However, with a long term view in mind, and particularly for income investors (yields up to 6 or 7%), property is once again on the agenda, and is worth considering (although probably not in the first 90% of a portfolio, since liquidity issues may rear their head again at some point in the future).

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