Clerical Medical Bond Performance

Old_Slaphead

I’ve a CM WPB that’s shown "growth" of 24% in the 7+ years that I’ve held it. The FTSE100 at around 6100 is approximately the same (ie it was 5900) as when I took the bond out. At the time, although I used an execution only service the WPB was marketed as a low risk investment.

To date it appears to be an (under) performing pseudo-tracker with the "growth" achieved being less than the dividend yield on the FTSE. I’ve asked CM for an explanation but has anyone any views of this performance level and is it significantly better or worse than similar LifeCo offerings?

dunstonh

Clerical Medical Bond performance is perhaps not the right title as the CM bond is just a tax wrapper that currently offers around 60 funds with some very good options and some pretty poor options. Its a good low risk fund provider though.

The product you have is a legacy product and not currently available for new business. It investments into a pretty poor quality fund which CM are now investing with solvency issues being the key driver rather than rate of return. Low risk is probably the right tag in effect and you are getting low risk level of returns for a pretty defensive fund.

I dont forsee any improvement with the CM WP fund. Indeed, the only two that are really worth keeping (subject to contract events and guarnatees) are norwich union and prudential.

EdInvestor

Old_Slaphead wrote: »

I’ve asked CM for an explanation but has anyone any views of this performance level and is it significantly better or worse than similar LifeCo offerings?

The reason for the poor performance is that the CM WP fund is no longer mainly invested in the stockmarket - as it was when you invested - but in the bond market, which although alleged "safer", produces lower returns.Most lifeco WP bonds are similar.

If you want equity returns, then best to move it to an equity investment, such as a bunch of unit trusts.Note also that investment bonds (of which this is one) also feature high charges and taxes.The ISA wrapper is usually a much better bet.

Is there an MVA exit penalty if you cash it in?

Old_Slaphead

EdInvestor wrote: »

The reason for the poor performance is that the CM WP fund is no longer mainly invested in the stockmarket - as it was when you invested - but in the bond market, which although alleged "safer", produces lower returns.Most lifeco WP bonds are similar.


Is there an MVA exit penalty if you cash it in?

Currently 1% - I'm decided to cash in at least some on bond due to the poor return.

Geoffo_M

I've just cashed in my CM WP bond. There was a 2% MVA on mine, but generally the performance has been very poor (mine was 19% after 7 years!)

Be careful with the tax position. When I received my cheque they included a statement of gains made and a calculation of notional tax paid under the scheme. CM said I should include these with my next tax return, but I'm not sure quite what the implications are.

dunstonh

I've just cashed in my CM WP bond. There was a 2% MVA on mine, but generally the performance has been very poor (mine was 19% after 7 years!)

Thats not good but its not that bad. Its a lot better than say a FTSE100 tracker fund which would have seen you at 12% over 7 years (and that is before recent correction). Yet you see people on this forum putting money into trackers all the time. (tracker used was L&G. Only used due to its popularity)

Be careful with the tax position. When I received my cheque they included a statement of gains made and a calculation of notional tax paid under the scheme. CM said I should include these with my next tax return, but I'm not sure quite what the implications are.

Surrendering creates a chargeable event and if you are a basic rate taxpayer, you should be able to take advantage of top slicing relief where you take the gain, divide it by the number of complete years to give you a value. That value is added to your income and if you are still a basic rate taxpayer, you pay no tax and there is no need to declare it on a tax return. If it takes you into higher rate tax you pay the difference in basic rate and higher rate on the amount that is in higher rate (basic rate tax is assumed paid already).

dunstonh

Correction/amendment to above post.

Thats not good but its not that bad. Its a lot better than say a FTSE100 tracker fund which would have seen you at 12% over 7 years (and that is before recent correction). Yet you see people on this forum putting money into trackers all the time. (tracker used was L&G. Only used due to its popularity)

I had a datafeed update this afternoon and that figure at 12% over 7 years to end of June 07 is now 1.20% over 7 years to end of July 07.

If it was to today, it would be a loss.

So, you do need to look at it in perspective.

EdInvestor

Of course you shouldn't compare a With Profits investment with a tracker, that's not like for like. In the past (ie 7 years ago) WP funds typically mirrored balanced managed funds with around 75% in equities, 15% in property funds and the rest in bonds and cash. As a result of these lower risk investments you wouldn't expect a WP investment to do as badly as a tracker (100% in equities) at a time of equity market downturn.

However in 2003, the rules for life insurance company solvency changed ( mainly so as to avoid any repetition of the Equitable Life disaster) and companies were forced by the regulator to reserve money in bonds for all their guarantees.The result is that instead of having an asset mix of 75% equities/25% other lower risk, in many cases they noe had 40% equities/60% other lower risk.

This meant that when the stockmarket bounced back, most companies only partly benefited because they didn't actually own many shares any more.So as of 2003, your WP bond became safer than it was before, but you got lower returns.

Many people were sold WP products such as endowments and bonds on a false premise - that you could have full stockmarket returns at little extra risk than cash in a building society.

The lesson is that there's no such thing as a free lunch.

Old_Slaphead

Old_Slaphead wrote: »

I’ve a CM WPB that’s shown "growth" of 24% in the 7+ years that I’ve held it. The FTSE100 at around 6100 is approximately the same (ie it was 5900) as when I took the bond out.

On checking the FTSE100 again I see it was 6100 when I took Bond out towards end May 2000 ie. same as earlier this week when I asked CM for a value. The return of 24% therefore appears to equal FTSE100 yield less charges. Basically I've got a slightly outperforming tracker fund (although it would have been underperforming when index was 6700).
Ok I suppose the return hasn't been as poor as expected (but still not good) esp. if it holds it's value into the current market slide. It's not however what I thought I was buying into at the time! Still I suppose it's 'de rigeur' nowerdays for LifeCos to use MVAs to that effect.

dunstonh

Its certainly not as good but we do need to remember that the availability of modern investment funds and the low cost of unit linked funds is a more recent event.

The CM product was typical for the year in question and had for decades made very good returns. Albeit because modern investment options were not typically available to the average person.

I was lucky that I started my career with a unit linked background back in the early 90s. My employer then didnt offer with profits so I was brought up on unit linked and have never really been a fan of with profits. That said, there is a still a time and a place for them in the right circumstances and I have a few on my books still which are performining in excess of 10% a year. The capital security on death is important to these individuals and they have no complaints about the return. So no need to change them. I wouldnt have my own money there but it suits them.