Sheffield Mutual with-profits bond.

longleggedhair

I have £50000 which I have no use for (I have other savings & Investments) and was looking for something lowish risk but with some potential for growth.

I've been looking at the above, and the society seems to be a very well run small Friendly Society and has produced some impressive returns for members, I like the fact there is a guarantee of a minimum return of your money + 3% in 5 years.

I wonder if some of the experts on here had any thoughts on the product before I go ahead.

PeacefulWaters

It's an endowment policy.

Charges on the fund are not explicit (red flag) but I'd anticipate them to be high.

The 3% guarantee you refer to is like getting excited about a fixed term savings account paying 0.59% a year for five years.

bowlhead99

longleggedhair wrote: »

I've been looking at the above, and the society seems to be a very well run small Friendly Society and has produced some impressive returns for members, I like the fact there is a guarantee of a minimum return of your money + 3% in 5 years.

With-profits is an old-fashioned type of investment product; in the modern era we are used to seeing funds reporting their performance transparently and the investors receiving that performance. Whereas in a with-profits fund you never get to see how the underlying assets actually performed, you just know that any profits they made in the good times when you invested, might well be kept back to give to other investors in the bad times to try to make sure that nobody makes a loss on paper.

But the minimum return of 3% total over five years could be way lower than inflation (e.g. a modest assumption of 2% a year over next five years would be 10% but they only give you 3% so you would be down in real terms)

Per their FAQ, their charges are 5% at the start and 0.5% annual which get taken into account when determining bonuses. Modern transparent funds are available for 0% at the start and anything from 0.3 to 1% annual, which is a lower overall cost structure than this over five years, so would likely produce a better return.

When you look at the bonus history to April 2016 published on their site, you can see that the last five year bonuses have been 2012: 3%, 2013: 3%, 2014: 3%, 2015: 2.75%, 2016: 2.75% . For holders who invested in 2011 maturing in 2016 there was also a 5% terminal bonus. So, 25.5% over five years, which is about 4.5% annualised, lower than many commercially available low risk funds as returns from bonds, equities and property have all been substantial over that time frame. So I'm not sure that "they have produced some impressive returns for members" would stand scrutiny over the last 5 years.

The return since April 2016 - a lucrative time for most people with stockmarket-linked investments - is unpublished, because unlike modern products with daily prices, the fund is not operated transparently; they have to wait until the year is up, see what they made, and then see how much they can afford to give you while wanting to keep the rest back for a rainy day ('smoothing of returns').

Per the history sheet I linked above, the fund invests heavily in tenanted UK commercial property and in commercial mortgages (together 45% of the fund). If you read the views of many property investment fund managers and of commentators in the commercial property sector, they say that by last summer, the commercial property sector was coming to the end of a long bull run with growth starting to flatten off; the future looks uncertain, particularly with the unknown effects of Brexit. So the fund didn't post stellar returns over the last five years anyway (imho) and now the major component of the fund might not be contributing as much - maybe losses depending on changes in interest rates, international trade and other market impacts.

So, although they have a history of bonuses it is possible that the investment could produce the 'bare minimum' return of your capital plus 3% if times are tough (and remember 3% over five years is lower than 0.6% compound interest, as PeacefulWaters pointed out, and well below inflation estimates). Clearly, that capital plus 3 is better than losses, if markets crash. However you are giving up potential upside returns to high charges and smoothing and a cautious stance of the fund.

So it's an outdated product (aside from it not being as tax efficient as something done in an ISA or pension wrapper) and the returns are unlikely to be very high. But the thing going for it is that there is 'some' (unknown amount) of upside while you won't get an outright loss (just potentially a real-terms loss after inflation).

You mention this is a 'spare' £50,000 and you already have various other savings and investments. Is it really necessary to invest in a relatively high fee, un-transparent, tax-inefficient product giving a profile of returns suitable only for very cautious people? Do you need the money back in 5 years for a particular piece of lifestyle spending, or in reality would you then be looking around for another product for the next 5 or 10 years and the next 5 or 10 after that?

If you would be reinvesting at the end, then the potential to lose a bit of value in the next 5 years is not such a big deal because there is plenty of time for markets to recover if they went down; so restricting your return to something hyper-cautious to avoid all possible paper losses, is going to stifle overall performance significantly. If your timeframe is greater than 10 years (at least for part of the money) then 'conventional modern investments' may suit you better than friendly society with-profits, in terms of the potential returns available from them.

This is not a product I would go anywhere near for myself, but my needs and my understanding of investments are likely to be both quite different from yours. This type of product is aimed at someone who doesn't know or want to know much about modern investment options, preferring the 'certainty' of plodding along and not losing the nominal value of their money in a five year period [although if you withdrew in that period you may suffer a large penalty, and avoiding a nominal loss doesn't mean avoiding a real terms loss if inflation is high].

There is no doubt that this type of product would be appealing to some people, which is why they still exist. However, endowments and with-profit schemes are no longer popular investment options with most.

longleggedhair

Thank you both for those thoughtful replies.

The money came from some equity sales I've made over the last couple of weeks, my equity holdings had grown too large for my liking due to the strong markets over the last 5 years. So I made some sales and rebalanced.

I already have a decent amount in cash so my thoughts were rather than leave it in cash earning nothing this gave some potential for upside with a guarantee of a (small) profit.

While I accept the disadvantages of with-profits this seems to be the best option I could find regarding product and performance. But thank you so much for the thoughtful and considered replies. I shall have to ponder.