Globaleye.com

The With Profit investment concept has been popular now for over 150 years, and has offered investors steady consistent medium to long term growth over that period. The key to this success has been in its unique design as an investment class.  Normally the words "low volatility", are not usually associated with equity based investments, however, in the case of With Profits this has been its key to success.

How can this be achieved?
By the application of a technique called "smoothing", smoothing is simply the creation of reserves of capital in years when markets are up, and these reserves are then held back for distribution to investors when markets are down, thus providing consistent steady returns over the medium to long term negating the natural tendency of peaks and troughs associated with global equity markets. This feature gives With Profit investors the "sleep at night" factor.

In addition to the application of smoothing to the fund, the main features of typical With Profits are a capital guarantee on initial investment, and annual bonuses which are declared in advance and added to the original amount over the following twelve months, these bonuses once added they cannot be taken away, this effectively provides a rising capital guarantee. Added to this the individual investor may benefit from a final or leaving bonus when they exit the fund or the plan matures. This final bonus is a reflection of the amount of reserves that have been created over the period that the individual has been invested and the bonus is the individual investor's share of this surplus.

With Profits has typically been used over the years as the main vehicle for long term pension planning, simply because of the long term steady growth and lack of volatility. The UK pensions market is in excess of £1,000 Billion, of which almost 60% is in With Profits, a testament to its long term pedigree as an investment class.

So how can this concept be improved upon? And given its long term track record of solid returns and security, why would anyone want to fix something that appears not to be broken?

Because of their steady return some investors opt for leveraging their portfolio. How do the leveraged options work and what are the benefits for me as an investor though? Leverage simply means that you or a With Profit Fund Manager will either borrow one or two times your initial investment, x1 or x2, and invest it in the provider and currency of your choice, and then return to your fund the difference between the annual guaranteed bonus and the cost of borrowing, below is a series of simple examples.

Invest $100,000 no leverage over 10 years average annual return 6% = $168,510

Invest $100,000, borrow $100,000 over 10 years, cost of borrowing 3.5%, average annual return 6% = $198,076 an improved return of 43%

Invest $100,000, borrow $200,000 over ten years, cost of borrowing 3.5%, average annual return 6% = $227,642 an improved return of 86% over the non leveraged option

Of course these options rely on investment returns and the cost of borrowing remaining in line over the period. Some Fund Managers have secured interest rate caps at 4% for $ and 3.37% for Euro over the next three years, bonus rates are likely to remain in the region of 8-10% for the next four to five years

In addition some Fund Managers have removed all the associated risks of taking the leveraged options by the fund borrowing the money not the individual, therefore the individual can never face a margin call or find themselves in a forced sale situation.

In short the benefits of With Profit funds are clear: