A lot has changed in the last 20 years, and so have smoothed funds

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Cast your mind back to the early 2000s – Google and Amazon launched, the dreaded Millenium Bug failed to materialise, Apple released the first iPod and the Euro was introduced.  

Technology, investment, and financial planning have all moved on over the last few decades. And that could be true of smoothed funds. 

If your opinions on smoothed funds are still tainted by their With Profits ancestors, now could be a good time to take another look at this way of managing volatility for clients on-platform and within a CIP (Centralised Investment Proposition).  

First, let’s be clear on what smoothing is all about in today’s investment world.  
 

Smoothing in simple terms 

In general, the value of a typical fund, such as an OEIC (Open-Ended Investment Company) or ETF (Exchange Traded Fund), is that of its underlying assets. This value will fluctuate with the normal ups and downs of global markets; we could say this type of fund has an ‘unsmoothed’ value. 

A smoothed fund operates differently. Typically, a multi-asset fund, it uses a consistent methodology to iron out day-to-day volatility.  

We do this in our own Standard life Smoothed Return Pension Fund by setting an Estimated Growth Rate (EGR). Each day, the Smoothed Price of each unit in the fund will normally increase in line with the EGR and any smoothing adjustments, less the fund charge. Over time, the aim is to even out market volatility day-to-day, giving investors a smoother path to investment growth. 

A brief history of With Profits funds 

The objective of With Profits funds was to give investors steadier returns using reversionary and terminal bonuses as a type of smoothing mechanism, often backed by a form of security guarantee. This would mean that, after a specific number of years, they could receive a ‘guaranteed sum assured’ – a set proportion of the amount they originally invested. Along with this, investors would get any guaranteed increases added to the fund during that period, in the form of bonuses.   

Exactly how this smoothing operated, and who presided over the guaranteed bonuses, were often far from clear. These guarantees were discretionary (and subjective), and they gradually fell from favour.  

Unitised With Profits (UWP) funds came along on the eve of the millennium. They operated more like standard funds: the value of the investment plan was the current unit value multiplied by the number of units held. A step in the right direction for simplicity and transparency.  

There were still challenges, however. It was often difficult to get a clear view of the amounts deducted from the UWP fund to pay for annual charges and other costs. While there was no guaranteed sum assured there was potential for bonuses, leading to some unrealistic expectations among investors.  

Withdrawals from With Profit funds were subject to Market Value Reductions (MVRs), sometimes known as Market Value Adjustments (MVAs), intended to make sure any payout was a fair reflection of their portion of the fund while also protecting the remaining investors.  

MVAs were designed to make sure investors received the return from the underlying assets. If their accumulated bonuses were above the value of the underlying assets when they decided to exit, an MVA was applied to realign their policy with the assets. The issue here was that, when investors crystallised their policies, it was unclear whether or not an MVA would apply. This created uncertainty for investors and advisers alike, eroding trust in the policies. 

Providers tried to make it clear how regular and final bonuses would be calculated, as well as offering MVA-free withdrawals each year, but it still placed a particularly heavy burden on advisers.  

The first decade of this century was marked by the bursting of the dot com bubble and subsequent prolonged volatility. Investment policyholders experienced multiple years with negligible returns. Some providers faced collapse because of the guarantees they still had in place. 

While UWP funds continue today, lessons learned on all these points have informed a new generation of modern smoothed managed funds.  

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A fresh take on smoothing for today’s investors 

The days of the dot com bubble bursting are long gone. We’ve been through the Covid-19 pandemic and artificial intelligence has arrived. And now smoothed funds use a simple, transparent formula for potential growth.  

Daily pricing enables more accurate valuations of the client’s investment. Withdrawals aren’t usually subject to MVRs, making it a more predictable and dependable way to access invested money. 

By removing the uncertainty of the conventional With Profits approach, a smoothed managed fund gives advisers something both concrete and positive to discuss with clients. This is particularly beneficial in our environment of continuing volatility. 

Plus, when it comes to our smoothed offering, the Standard Life Smoothed Return Pension Fund, the solution is priced competitively at 0.80%, which is lower than the average OCF (Ongoing Charges Figure) of UK active multi-asset funds. To a large extent this pricing is down to both competition and technological advancements. 

Moreover, with smoothed managed funds increasingly available on investment platforms – the Smoothed Return Pension Fund is available on Fidelity Adviser Solutions platform - advisers can simply incorporate them within their CIP and CRP (Centralised retirement proposition) for use with appropriate clients as part of their suitability-based financial plan. 

To find out more information about our Smoothed Return Pension Fund, contact your dedicated sales person or visit our website.