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PruFund - a fund for all seasons?

Author Image Vince Smith-Hughes Director of Specialist Business Support
6 minutes read
Last updated on 17th Dec 2019

One of the headlines from a daily newspaper, back at the launch of the first PruFund in 2004, read, “Pru attempts to resurrect With-Profits”. Fifteen years and £50 billion in funds under management later, I’d argue that Pru has been successful with the introduction of a new fund concept, and credit for that must go also to the adviser community, who have used the range in a variety of circumstances.

But why have advisers embraced the PruFund range as a suitable destination for client funds? Well, let’s explore a few of the client types and financial planning areas that advisers commonly use it for.

The sleep-at-night pill

Returns from deposit-type accounts, whether they are held directly or via a tax wrapper such as an ISA or pension, have continued to dwindle over the last few years. Savers looking at deposit rates today are unlikely to get much in excess of 2%, even assuming they are prepared to tie their investment up for a relatively lengthy period.

But what about those clients who can afford to tie their funds up for five years, but remain nervous about the day-to-day volatility that investing in real assets such as equities, property and bonds brings? What return can they expect for taking this risk?

I’ve always believed very few things in life are worth losing sleep over, and that includes an individual’s investment strategy. There are some clients who simply won’t invest, unless they can spare themselves at least some of the angst of day-to-day fluctuations in the value of their investment.

This is where PruFund can come in. For individuals who are prepared to invest for a minimum period of five years, and are prepared to accept a level of risk, then PruFund could be a suitable fund for them, as it aims to reduce the typical day-to-day volatility of those assets. It also gives them an ‘expected return’, which gives the investor some idea of the potential benefit over deposit-type arrangements for the additional risk they are taking.

Sequencing of return risk

Keeping in mind the value of any investment [and any income taken from it] can go down as well as up so your customer might get back less than they put in.

Much has been written about this of late, particularly since pension freedoms came in. What is the risk? It’s effectively that the order returns are delivered in can significantly impact the future value of the fund, even if the returns are identical. This might happen where units are being encashed to provide an income, as potentially is the case of income drawdown or an investment bond paying income.

Let’s look at an example to prove the point – here £275,000 is invested over six years, and the returns from portfolios A, B & C are as follows

  Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
A 25% 5% 20% -15% -20% -5%
B -5% -20% -15% 20% 5% 25%
C 25% -5% 5% -20% 20% -15%


Investment of £275,000 – no income

  Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
A £343,750 £360,937 £433,125 £368,156 £294,525 £279,978
B £261,250 £209,000 £177,650 £213,180 £223,839 £279,978
C £343,750 £326,562 £342,890 £274,312 £329,175 £279,978

Investment of £275,000 – £1,500 per month income

  year 1 Year 2 Year 3 Year 4 Year 5 Year 6
A £323,395 £321,081 £365,402 £294,090 £219,288 £190,815
B £243,741 £179,009 £135,656 £142,892 £131,553 £144,087
C £323,395 £289,717 £285,719 £212,591 £235,214 £183,430


As can be seen, the returns are the same in portfolios A, B & C – just in a different order. This makes no difference when no income is taken – but introduce income into the picture and the importance of considering this as a risk quickly becomes apparent. Portfolio B highlights the risk that with poor performance in the first three years, losses via income being taken are effectively being ‘crystallised’, and are thus never recovered.

While there are other methods of dealing with this sequencing of return risk, PruFund can help to alleviate some of the risk, as both its wide diversity of assets and also its smoothing mechanism can help to reduce day-to-day volatility. This can be used as the main strategy for dealing with this risk, or as one of a number of methods which are employed.

Diversification

Advisers have identified that PruFund can form part of a portfolio, for example potentially sitting alongside an adviser’s discretionary or managed portfolio service. This can provide exposure to markets, while allowing advisers to potentially operate a ‘core and satellite’ type approach to the overall client portfolio.

PruFund’s smoothing mechanism can also reduce overall volatility in the portfolio, thus allowing more volatile funds to be considered, assuming the overall portfolio meets the client’s risk profile.

 

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Consolidating and regular investing – having your cake and eating it?

Pound cost averaging and regular investing are one of the lessons that seem to be taught on the first day of any financial services career. Put simply, as long as the average price paid when someone invests say monthly is lower than the eventual unit price when units are encashed, then the customer has made a profit. In many ways it is the opposite effect of the sequencing of return risk discussed above, which has also been called ‘negative pound cost averaging’.

However, it is possible to enjoy the benefits of an element of caution for existing investments, but also benefit from pound cost averaging on regular contributions. Say, for example, a client has accumulated a large pension or ISA fund, and wants to perhaps reduce the risk of their fund, but also continue to save. Within Prudential Retirement Account or the Individual Savings Accounts, it is possible for a transfer of existing funds to be made into one of the PruFund range, benefiting from smooth returns and the wide diversity of investment held in the fund. However, ongoing contributions can continue into a collective fund, where day-to-day volatility is expected to benefit from the ongoing advantages of pound cost averaging. This can be an effective strategy for an adviser to use, and at some point in the future they may decide to switch some of the collective funds to PruFund, if deemed appropriate at the time.

Risk-managed PruFunds

Though I have generically referred to the ‘PruFund’ or ‘the PruFund range’ throughout this article, it may be that it suits an adviser’s suitability and advice process to use a specific risk-managed range, which of course exists in the PruFund suite of funds.

For example, an adviser may well test both a client’s attitude to risk and also their capacity for loss at annual reviews. Should for whatever reason either or both have changed sufficiently, then the adviser may deem it appropriate to move the client up or down the risk ladder. In this way the client can continue in a smoothed fund, while the investment strategy adapts to fit their changing circumstances.

Summary

Though the above list is not exhaustive, I hope this gives you a taste of why some advisers are using the PruFund range. Fifteen years after the launch of the first PruFund, the range is in great shape, and well positioned to help advisers meet their clients’ expectations for many more years to come.

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