With-profits investments are something of a mystery to novice and seasoned investors alike. The life companies will tell you that a with-profits contract includes the benefit of bonuses determined at the discretion of the directors of the company.
The fundamentals of the with-profits investment approach have held firm despite some major changes in the industry in the past two years. Moneywise Financial Planning has issued an update to its "With Profits" report which recaps on the changes in the past two years.
The greatest impact is likely to come from Standard Life's decision to open its mutual with-profits fund to lump-sum investors. Standard Life is aiming to capture 10 per cent of the market or £40 million (€50.8 million) in new business by November. The fund has proved very popular in the UK where the mutual is currently taking in £25 million per week.
The biggest issue to affect with-profits customers last year was been the Equitable Life debacle. The life assurer closed its doors to new business in December after losing a test case over its treatment of guarantee annuity policy holders.
According to Moneywise, the way forward for existing customers has yet to emerge, pending ongoing negotiations in Britain. Equitable's Irish arm is transferring its operations to Britain. CGU, a leading player in with profits, sees its fund isolated pending eventual fusion into Hibernian Life & Pensions.
Scottish Provident took the de-mutualising route and in the process, introduced "parallel investment", requiring an equal sum to be invested in other unit-linked funds.
Finally, Guardian Life's fund was subsumed into Royal Liver to emerge as Caledonian Life, a new player in the mutual stakes.
These changes leave six competing providers in the Irish with profits market - Caledonian, Canada Life, Friends First, Hibernian, Standard Life and Scottish Provident.
So what is the with-profits investment style and who is it appropriate for? The Moneywise Update gives the following explanation: "By investing in a mix of underlying assets (including a dominant element in real assets such as ordinary shares), with-profits funds afford a relatively high-yielding yet secure environment."
Market volatility is smoothed over and underlying guarantees on the original investment and bonuses accrued are built in at a price.
The element of capital security and the protection from market volatility make these funds attractive to cautious investors.
One key difference between a with-profits investment and a regular unit-linked fund is that the timing of taking money out of the fund will not make such an impact on the returns.
In a year when investment returns are good, payouts will not increase by as much as the underlying returns and in bad years payouts will not decrease by as much as the underlying returns. This is known as smoothing.
Standard Life's with-profits investment bond, which was launched on the Irish market last week, has been welcomed by Moneywise.
As a mutual, only policyholders are the shareholders and the organisation does not have to generate profits.
Breaking with tradition, one of Standard Life's principal strengths is that it dispenses with costly lifetime guarantees. This goes against one of the conventional hallmarks of with-profits bonds and may deter some investors. The only guarantee is face valuation in the event of death.
However, released from the strictures linked to guarantees, Standard Life's fund will hold around 90 per cent in equities. The industry average is closer to 70 per cent.
Carpetbaggers note, investors to this fund have to sign a disclaimer acknowledging that any policyholder benefits that would flow from a de-mutualisation process will not accrue to investors who invest less than three years prior to such an event.
Like most equity-based investments, with-profits bonds are best suited to those who are prepared to leave their money in for at least five years.
There's generally a fall off of about 5 per cent per year and it's estimated that less than 60 per cent of investors make it to 10-year mark.
