Smoothed operators: Why With Profits could be a win-win

Introduction

Investment markets – by their very nature – are volatile. Received wisdom states that the only way to overcome this volatility is to invest in a diversified portfolio of assets over the long term. However, there are also investment funds that are designed specifically to minimise the risk of short-term peaks and troughs and smooth out an investor’s journey.

That has real appeal at times like these, when there is so much enduring uncertainty affecting global markets, from elections in the US to war in the Middle East. If you are investing to a set timescale, like your retirement, that is going to be particularly nerve-racking.

This is exactly what the Wesleyan With Profits Growth Fund is designed to overcome. It has a proven track record of delivering steady investment growth, through good times and bad, by investing in a diversified mix of UK and international equities, bonds, property, cash and other assets.

Financially strong

The fund is backed by a financially strong mutual, that, without shareholders, has scope to invest with a long-term approach, removing the pressure to pursue short-term gains. It aims to achieve greater consistency of returns through its unique smoothing mechanism. This reduces the impact of short-term price fluctuations, by holding back some profits when the fund is performing particularly well, to be shared out in times when the market is performing poorly.

It has delivered returns of more than 70% over the last 10 years (as of 31 August 2024), while also creating more certainty for investors along that journey.

Wesleyan’s smoothed With Profits Growth Fund has a typically low FE fundinfo Risk score, currently 9 (as of 31 August 2024), compared with the FTSE 100, which has a risk score of 100. That’s especially important at a time when interest rates are on a declining trend, weakening the case for holding cash even while markets remain risky.

Increasing exposure, overcoming anxiety

Wesleyan recently surveyed 300 financial advisers and found that almost three quarters (73%) are already helping all or most of their clients increase their equities exposure in anticipation of interest rates declining further. Nine in 10 (89%) of this group said this was because they believe cash won’t deliver sufficient returns going forward. Two in five (43%) said their clients were concerned this strategy would mean more risk, with similar numbers (41%) worried about market volatility.

Against this backdrop, 45% told our survey that they had started or increased their clients’ investments in smoothed funds.

Let’s look at an example - Satwinder is 57 and has recently consolidated several defined contribution pension pots into a SIPP. She is also contributing to a company pension plan, as is her employer, with the aim of retiring at 67.

Satwinder also has grandchildren and would love to go part time to help with their care. That would mean her current salary of £32,000 would drop to £17,000, leaving a £15,000 shortfall to maintain her current lifestyle.

Satwinder could bridge the gap by drawing down against her SIPP, but she is nervous about the potential impact of encashing units in her SIPP while markets remain volatile. She’s now having second thoughts about cutting her working hours and has turned to her adviser for guidance.

Along with her adviser, Satwinder was able to formulate a tax efficient plan that combines her pension commencement lump sum (PCLS) and income from her SIPP. That starts by investing half her £400,000 SIPP in the smoothed Wesleyan With Profits Growth Pension Fund, while the rest remains in a Multi-Asset Managed Portfolio.

Every time she makes a withdrawal from her SIPP, Satwinder’s adviser will consider the prevailing market conditions to decide which fund to access to best counter the impact of pound cost ravaging.

When times are good, she may be best to draw down against her Multi-Asset Managed Portfolio. However, when markets fall, it may make more sense to draw down against the smoothed fund, which could reduce the impact of pound cost ravaging while offering potential growth benefits when conditions improve.

Effective and accessible

It’s an effective and accessible solution; the Wesleyan With Profits Growth Fund is available on the independent abrdn Wrap, Wealthtime and Nucleus platforms. That means it can easily be incorporated into a diversified portfolio.

Uniquely among smoothed funds – Wesleyan’s fund avoids the need for market value adjustments (MVAs) or unit price adjustments (UPAs) because it is daily priced, daily traded and daily smoothed. So, advisers can get instant valuation information and clients can access investments in line with standard platform timescales, without waiting days or even weeks.

At times like these, Wesleyan’s  With Profits Growth Fund can be a win-win solution for advisers, helping smooth both clients’ anxieties and market volatilities.