Investing in Traded Endowments

London – 26 March 2009

Martin Fagan from What Investment investigates the rise of insurance policies as an attractive defensive asset class.

It has taken a banking crisis, a stock market collapse, a global credit crunch and interest rates falling to almost zero per cent to make endowments fashionable again.

Twenty-five years ago, endowments were seen as the Swiss army knife of financial products, suitable for everything from paying off your mortgage to school fee planning.

But their fall from grace was as swift as it was spectacular – the accusations that the policies were mis-sold and constant headlines in the financial press that dwindling bonus rates meant the maturity payout might not cover the outstanding mortgage on a home, all contributed to their near-demise.

With-profits endowments are often given a bad press,’ says Brian Goldstein, chairman of the Association of Policy Market Makers (APMM). ‘But the last performance survey, published at the end of 2008, showed an average annual return of 8.3 per cent over 25 years. This means that with-profits policies outperformed the average of Balanced Managed, UK All Companies and UK Equity Tracker funds and both instant-access and 90-day notice accounts over 15, 20 and 25 years. It also shows that, over 25 years, the average endowment returned more than double the average instant-access account.’

Back in vogue

So if endowments have never been as awful as they’ve been made out to be, why are they suddenly fashionable again? ‘I think it is the way they were perceived by the investing public,’ says Ian Cotgias, senior actuary at Surrenda-link Investment Management, the advisory and management arm of Surrender-Link, which has been trading endowments since 1990. In that time, the firm has traded more than £1 billion of policies.

‘The connection with mortgages was where all the bad publicity in the 1990s stems from. Because they were sold on the back of unrealistic expectations, this has detracted from their benefits as an investment class.’

Cotgias believes the ‘smoothing’ effect of the bonuses – where gains in good years are held back to bolster bonus payments in years when markets have performed less than spectacularly – is an ‘enigmatic feature’ that makes endowments attractive. The strong guarantees of the sum assured and the accrued bonuses are augmented by the protected nature of life companies’ with-profits funds.

A degree of protection

‘In a life company, the with-profits fund is ring fenced and, because assets have to match liabilities, the life company can’t raid the with-profits fund to pay out as dividends to shareholders,’ says Cotgias. ‘They are also backed by the FSA’s financial compensation scheme. They offer good stability in falling markets because the maturity values are slow to adjust to the falling market. Surrender values adjust more quickly to a falling market and are slow to adjust to a rising market, which is one of the reasons it is better to trade your endowment than surrender it back to the life company.’

With-profits endowments are a distinctly British product. And, as each policy is written on the life of an individual, all are unique, but they have features in common: the monthly premium, the term of the endowment (usually 25 years) and the basic sum assured. When the policy finishes its term, the accumulated annual profits and the basic sum assured are paid to the policyholder. This can be augmented by a ‘terminal’ bonus, but this is discretionary and isn’t guaranteed.