Financial advisers have been singing the praises of with-profit investments since the spring and the beginning of the stock-market tumble. This is mainly because they offer such a safe and usually well managed alternative to volatile equity-based funds and especially to the reducing returns of deposit accounts.
With-profit bonds are an especially attractive outlet for someone with a lump sum - usually a minimum of £5,000 - and no urgent need for the money. A fiveyear investment period is the shortest that should be undertaken, but because of the way annual bonuses are applied, even longer investment frames are ideal. Certainly, it is always recommended that the full period of the contract be seen out to benefit fully from any final maturity bonuses.
But just how well are the main with-profit bonds on the Irish market faring?
In the first of what it plans will be a series of reports on unitised with-profit funds, BCP Stockbrokers has tracked the performance of these funds over the past five years, comparing them to the returns from high yielding post office and building society accounts. It also takes a closer look at the four unitised with-profit bonds from Canada Life, Commercial General Union, Friends First and Norwich Union and The Equitable Life's with-profit bond. It compares their main conditions, such as minimum investment levels, current bonus rates, entry costs and annual charges, early encashment penalties, the possibility of a terminal bonus and the asset split of the investment fund. (Equitable Life declined to officially participate in the survey, but supplied Family Money with up-to-date bonus rates and other information not included in it.)
The survey found, not too surprisingly, that with-profit funds have significantly outperformed building society and post office accounts since 1994. A high yielding building society account would have returned in the region of 34 per cent; an ordinary An Post Account less than 2 per cent and the average with-profit fund between 68 per cent per annum. (An Post's own bonds, it must be said, would have exceeded its ordinary account returns by several percentage points.)
Where the bonds differ from each other is in features such as the levels of bonuses declared this year: ranging from 5.5 per cent for Friends First, 6 per cent for Norwich Union's Celebration bond, 6.5 per cent each for Canada Life and CGU and 9.5 per cent for The Equitable Life. Regular withdrawals can be made from these bonds, but usually only up to certain limits, since withdrawals in excess of bonus levels, for example, could negatively affect the capital value of the funds.
Entry charges vary between the companies, from the standard bidoffer spread of 5 per cent to none at all, but this charge must be taken in the context of the amount of the investment that is allocated from year one to the fund and whether there are early encashment penalties if you do encash early. For example, the CGU bond does not have any entry charge and all funds are allocated from year one, but early encashment penalties of 5 per cent apply for the first three years falling to 3 per cent and 1 per cent in years four and five. The Equitable Life challenges BCP's claim that it has a 5 per cent bid-offer spread, given that its allocation of capital to fund is between 95 per cent and 97 per cent for amounts up to £200,000 and there are no early encashment penalties. Anyone who withdraws, for example, their £5,000 after even just one year will receive £4,500 back, the same amount CGU would pay, despite not having any official bid-offer spread.
Whereas Canada Life and Friends First will take into account the market value of the fund if you want to encash early - and this may put some of your capital at risk - Norwich Union very specifically notes that early encashment penalties will vary from a high of 8 per cent in year one down to 2 per cent in year five and a zero penalty in year six.
Canada Life's allocation of capital to fund is the best of the group with nearly 98 per cent allocation for sums in excess of £75,000 that are left in place for between five and nine years. This rate rises further if you decide to leave your fund for between 10-15 years, but there is a 5 per cent bid offer spread and encashment penalties. All but The Equitable Life note the possibility of a terminal bonus when the bond matures. In The Equitable's case, no terminal bonus is paid, but only because what would have made up the terminal bonus is paid out each year into the fund, resulting in its notional values - the value of the fund in each year leading up to maturity - being higher than most other bonds on the market.
Finally, for those investors interested in the mixture of assets that makes up their bond, the BCP report breaks down each company's preference for Irish and International equities, fixed interest (i.e. gilts), cash and property. The Friends First bond is heavily weighted towards gilts (42 per cent), while Canada Life only has 10 per cent in gilts and cash but 70 per cent in equities. The Equitable Life has the heaviest weighting in Irish equities (54.4 per cent) followed by Norwich Union (46 per cent) and CGU Life with 43.2 per cent. None of the companies except Canada Life (20 per cent) has much of an exposure to the property markets - CGU and The Equitable have excluded property altogether from their portfolios.
