Smoothed Investment Funds Make Comeback 2022?
Published / Last Updated on 01/02/2022
Brexit, the pandemic and stock market crash, recovery and current market volatility has created uncertainty for investors in equities. The move towards climate change action and ESG (environmentally friendly, socially responsible and governance) investing is also creating is creating its own ‘bubble’.
In addition, inflation, interest rate increase speculation and their effect on cash, fixed rate and index linked bonds and gilts making investing in these traditionally lower risk sectors has also created uncertainty for investors in money markets and bond sectors.
Labour shortages due to Brexit and covid-19 absences are also adding pressure to supply chains and delivery of goods and services across all sectors.
Finally, the property boom, higher taxes and duties for landlords, the housing shortage and raft of regulations on home improvement, safety testing and energy performance certificate improvements is creating pressure on the property market.
All the above have created volatility and uncertainty. This has turned our thoughts to a possible comeback of ‘smoothed’ investment return funds that smooth out volatility via several options.
What are smoothed funds?
They are designed to smooth out the peaks and troughs of markets by offering a smoothed-out return.
Old Style Smoothed Funds – With Profits
Developed in the 70s, 80s and 90s, another volatile period and still available today. With Profits funds generally invested around 80% in equities with the balance in cash, bonds and property. As markets grow and funds made ‘profits’, these profits were retained by the fund manager and then at the end of the year, a bonus is declared and added to your policy. If markets grew by 15%, you would not get a 15% bonus, probably nearer 3 or 4%, but then next year, if markets tumble by say 5%, you will still receive a bonus of c 3% or 4%. The fund manager usually keeps back profits as ‘reserves’ to enable a smoothed-out profit distribution policy over a number of years. Your fund values are also usually guaranteed not to fall. At the end of the policy or at retirement, if you are still due some undeclared profit from the reserves, you will usually receive a final bonus, sometimes called a terminal bonus.
New Style Smoothed Funds – Average Price Funds
Suited to your risk-averse clients, smoothing helps to iron out the peaks and troughs of the market. Your return: you receive the smoothed average fund unit price (think of this as an average share price) over the year. Smoothed managed funds are usually multi-asset/mixed asset class funds, similar to the types of assets inside a with profits fund to suit clients with a ‘very low’ to ‘low-medium’ attitude to investment risk.
Alternative to Smoothed Funds – Drip Feed
Pound Cost Averaging, put simply, drip feeding in and out of markets. Many clients choose to gradually switch in or out of markets over a period e.g., monthly or say 4 drip feeds per year over 4 quarters. This has a similar result to average price funds with the advantage that you can choose each quarter whether to invest/disinvest more or less depending upon market movements. For example, if you invested last quarter and markets have fallen, you have not exposed all your funds and made a loss, you now could invest more in the next quarter to buy more units at a cheaper price so that when markets ‘tick’ back up, you will benefit from even greater profit to make up for any loss in the quarter before.
