Using Prudential s PruFund range in an ISA

Transcription

1 Using Prudential s PruFund range in an ISA June 2018 Sponsored by

2 Contents Introduction 3 Defaqto Q&A review 4 ISAs Overview 5 Inflation risk 7 Sequence risk 8 Financial planning opportunities 10 Q1. What type of funds are they? 12 Q2. What are the aims of the funds? 14 Q3. Who are the team behind the PruFund range? 15 Q4. What is the investment process behind the funds? 16 Q5. How do the funds work? 18 Q6. How can the funds be accessed? 21 Q7. What are the fund charges? 22 Q8. How should the funds be assessed and compared? 23 Q9. Are protections (guarantees) available through the funds? 25 Q10. How have the funds performed? 26 Appendix ABI sector classifications 33 2

3 Introduction Prudential has commissioned Defaqto to carry out an independent fact-based review of the PruFund proposition. This review considers the use of the PruFund range within ISAs. The objective of this review is to provide advisers with the processes and information they should be considering when assessing the suitability of using the PruFund range. This review is carried out in the format of a Q&A report in which Defaqto poses ten key questions. While some of the questions are specific to the make-up of the PruFund range, many can equally be applied by advisers when carrying out due diligence research on other funds and investment solutions, and also gauging their potential suitability for clients. Andrew Duthie Insight Analyst (Wealth) aduthie@defaqto.com The Q&A review was conducted using Prudential s full suite of adviser and client-facing marketing literature. Defaqto has also had access to a senior representative of Prudential Portfolio Management Group Ltd (PPMG). This report represents Defaqto s understanding of the investment process, terms and conditions of the PruFund range, along with our comments on the key features and attributes of this proposition. It does not represent a recommendation to invest in the PruFund range, and Defaqto encourages advisers to conduct their own suitability and due diligence processes before selecting this fund solution, or any other, for their client. The ten questions posed by Defaqto are: 1. What type of funds are they? 2. What are the aims of the funds? 3. Who are the team behind the PruFund range? 4. What is the investment process behind the funds? 5. How do the funds work? 6. How can the funds be accessed? 7. What are the fund charges? 8. How can the funds be assessed and compared? 9. What ISA governance and administration is used? 10. How have the funds performed? 3

4 Defaqto Q&A review This Q&A aims to assist advisers with their research and due diligence process in appraising the features and suitability of the PruFund range in the context of an ISA investment. Once the fact-finding and risk profiling processes have been completed, it is vital to fully appraise the features and suitability of the various investment solutions available in the market before making final recommendations. This appraisal should be carried out to establish whether the investment fund and overall solution meet the needs and risk tolerance of the client. This document answers key points on the PruFund range and is designed to equip the adviser with relevant information with which to make a fully informed investment and planning decision. It also aims to support the adviser to document the research and analysis that has been carried out when delivering the comprehensive, fair and unbiased research the regulator expects. Acronyms ABI EGR PAC PPMG RPI SAA TAA UPA Association of British Insurers Expected growth rate Prudential Assurance Company Prudential Portfolio Management Group Retail prices index Strategic asset allocation Tactical asset allocation Unit price adjustment 4

5 ISAs Overview An Individual Savings Account (ISA) protects savings from tax as any growth is free of capital gains tax and no income tax is paid on income. Prudential offers an investment version of an ISA meaning that assets held inside the ISA should perform better than identical assets held outside an ISA, due to the beneficial tax treatment. It permits investment in stocks and shares along with other asset types. An ISA is available to any person meeting the following criteria: Aged 16 or over for a cash ISA Aged 18 or over for a stocks and shares ISA Resident in the UK A Crown servant (eg diplomatic/overseas civil service) or spouse/civil partner if they do not live in the UK There is an ISA subscription limit applied each tax year which confirms the maximum amount that can be invested. For the tax year, this figure is 20,000 and will remain so for 2018/19. There are five different types of ISA and each individual is permitted to subscribe to one of each type in any one tax year: Table 1: ISA choices Cash ISA ISA type Flexible ISA Notes Designed to enable cash deposits to be held and to grow free of taxation. Withdrawals from an ISA can be now be replaced within the same tax year that it was withdrawn. These repayments do not contribute towards the subscription limit. Any ISA offering this facility is a Flexible ISA. Investment ISA Innovative finance ISA Designed to facilitate investment in regulated stocks and shares main indices, such as the UK stock market. Designed to incentivise investment in the peer-to-peer (P2P) or Crowdfunding lending market place. Lending money can be risky as borrowers may not always be in a position to repay it. Some versions of this ISA mitigate the risk by facilitating your money being split across multiple loans and/or by providing secure safeguard funds thereby reducing the potential loss to a client if an individual loan was not repaid. 5

6 ISA type Help to buy ISA Notes Designed to incentivise saving to buy a home. These ISAs are only available to firsttime buyers. In the first month of opening, 1,200 can be invested and 200 per month thereafter. When the accumulated value is used to buy your first home, the government will add a 25% bonus (max 3,000), although this is only available on balances of 1,600+, as the minimum bonus payable is 400 Lifetime ISA Only available to those aged below 40, primarily to help buy their first home, worth up to 450,000 in the UK. Up to 4,000 a year can be saved and this will attract a government bonus of 25%. A couple buying a house together can each save up to 4,000 per year and then combine their savings to buy their first home. If the balance is not used to buy a first home, before the holders 60th birthday, then the entire balance (including the bonus) can be withdrawn tax-free. This ISA is inflexible and only contributions made before the holder s 50th birthday attract a bonus. In addition, withdrawing the balance at any other time will result in a 25% charge to recover the government bonus and the application of a charge. This may make the ISA an inflexible and expensive option compared to the other ISAs. Inheritance ISA allowance Those who have lost their spouse or civil partner since 3 December 2014 are able to inherit the value of the deceased s ISA investment, without affecting their own 20,000 limit. This document will concentrate on Investment ISAs. 6

7 Inflation risk To maintain the buying power of money, those taking income from their savings will need both the investment and the income it produces to increase by the rate of inflation each year. UK inflation is commonly measured by one of two indices: Retail prices index (RPI) Consumer prices index (CPI) The actual rate of inflation experienced very much depends upon what each of us spends our money on (in other words, our personal shopping basket). Looking at some common costs we all incur, especially those that affect pensioners, we can see some significant differences in Chart 1. Pensioners inflation Silver inflation OAPs inflation 3rd generation inflation Chart 1: RPI indices from 1987 to RPI Year RPI: Housing: Council tax and rates RPI: Food RPI: Fuel and light RPI (All items) Source: ONS data released January 2018 Irrespective of the method by which savings are accessed, when inflation is considered, it is clear that, for most, some form of protection against inflation in retirement will be critically important to avoid a decrease in the standard of living. Identifying exactly what your clients spend their money on will enable you to produce a more accurate understanding of the likely impact of inflation on them. Housing and fuel costs have consistently increased by more than the general RPI rate 7

8 Sequence risk Sequence risk or Sequence of returns risk is a significant issue for those living off income. Investors are more vulnerable to sequence risk because if they experience capital volatility while also taking withdrawals produced by the same capital, they can find themselves having to lock in losses. This can decrease their future income, but also restrict their ability to recover the capital: a lose-lose situation. The full implications of sequence risk are not always displayed in a way that fully illustrates the dangers. Therefore, in Table 2 and Charts 2A and 2B below, we have plotted the capital value of 100,000 invested over a 10-year period, where the total net return is 40% over the term. Table 2: Sequencing risk example Sequence of Value growth rates each year return Simple total Positive start +30% +25% +20% +15% +10% 5% 7.5% 10% 15% 22.5% 40% Linear +4% +4% +4% +4% +4% +4% +4% +4% +4% +4% 40% Negative start 22.5% 15% 10% 7.5% 5% +10% +15% +20% +25% +30% 40% Chart 2A: Sequencing risk with no withdrawals Capital value in 300, , , , ,000 Result Positive start 147,242 Linear 149,083 Negative start 147,242 50, Year Positive start Linear Negative start 8

9 Chart 2B: Sequencing risk with withdrawals of 4,000pa ( pm) Capital value in 300, , , , ,000 Result Positive start 116,563 Linear 100,000 Negative start 65,615 50, Year Positive start Linear Negative start Summary As illustrated, the sequence of the return can significantly affect the capital value and therefore the potential future level of sensible withdrawal that can be produced and that is available to take. It is worth noting that increasing the volatility of returns also increases the potential damage caused by sequence risk. Using investments with a linear type return and/or absolute guarantee can help to mitigate the potential damage caused to capital and long-term income by a poor sequence of returns. It should be noted that this approach may also sacrifice some upside potential. 9

10 Financial planning opportunities In essence, we consider it would be valuable for you to ask the following questions on behalf of your clients: Questions to ask when investing: Does this investment reflect the client s attitude to risk? Does this investment reflect the client s capacity and tolerance for loss? Does this investment aim to produce the required return at the right time? ISAs create a number of planning opportunities, and the improvements and changes to legislation mentioned earlier make them even more attractive: ISAs may sometimes be a more appropriate income source than pension savings Holders can withdraw the ISA value and replace this in the same year without affecting their personal allowance Holders are free to move between cash and investments Planning opportunities Save Access Cash Cost Consolidation Holistic planning Family of funds Manage risk Save with regular contributions and/or lump sums No extended lock-in periods to worry about Ability to diversify out of cash into historically better-performing asset classes PruFund annual costs are competitive and easily identified Transfer all existing ISAs into one for ease of administration and understanding, while improving investment diversification The PruFund range is available through ISAs, pensions and investment bonds, enabling one investment strategy to be used across each tax wrapper Have access to the following asset classes: Cash Shares Government bonds Corporate bonds Switching between each PruFund is easy, enabling a more or less risky fund to be held depending upon needs or tolerances 10

11 The opportunity to diversify out of cash The liberation of the ISA transfer rules now enables unrestricted transfers of cash ISAs and stocks and shares ISAs. Many clients have built up notable deposits within cash ISAs, resulting in some potentially being overweight in cash, compared to their expressed attitude to risk and needs mandate. Interest rates remain at historic lows, with savers and deposit holders searching for returns from their capital this dilemma can be accentuated where a genuine overweight position in cash holdings exists. Advisers identifying clients overweight in cash when compared to their objectives and profile will be interested to learn that the Prudential ISA allows cash reserves to be transferred in and invested in the PruFund range. Although Prudential does not offer a cash account, this transfer may help to reduce the investor's exposure to cash thereby enabling them to more accurately meet their specific overall needs and objectives if it is appropriate to reduce cash holdings. Is your client overweight in cash? It is important that clients only carry out such transfers if they understand the additional risks being undertaken and that the selected PruFund meets the client s needs and objectives, while being within their tolerance for loss and requirement for return. The following graph illustrates the performance experience of investors using the PruFund Cautious and Growth funds in recent years compared to those receiving the lower risk cash ISA average return. Chart 3: Average cash ISA compared to PruFund 190% 180% 170% 160% 150% 140% 130% 120% 110% 100% Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Source: Defaqto, June 2018 Cash ISA Prudential PruFund Growth Fund A-Pen Prudential PruFund 0-30 Fund Series A Pension Fund Prudential PruFund Cautious Fund Ser A-Pen Cash ISA returns are based upon average returns aggregated across all open ended and term based Cash ISAs on the Defaqto database. The pension fund series of funds have been used as they are almost identical to those used in ISAs but have been in existence for much longer. The basis of the illustration is the gross value of assets at month end. 11

12 Q1. What type of funds are they? The PruFund range is made up of multi-asset funds, meaning that each fund consists of a portfolio with a diversified asset mix designed to reduce investment volatility over the long term. Their structure and size also enable investors to have exposure to assets largely beyond other retail funds, for example infrastructure projects. There are six funds in the PruFund range available for use in an ISA, each with a different level of risk exposure. Below we illustrate how these funds measure against Defaqto s Risk Ratings. It is important that advisers consider the client s attitude to risk and combine this with both capacity for loss and required return to determine a client s agreed risk profile. High Risk Defaqto Risk Rating R I S K 10 DEFAQTO M A P P I N G PruFund R I S K 9 DEFAQTO M A P P I N G R I S K 8 DEFAQTO M A P P I N G R I S K 7 DEFAQTO M A P P I N G R I S K R I S K R I S K R I S K 6 DEFAQTO M A P P I N G 5 DEFAQTO M A P P I N G 4 DEFAQTO M A P P I N G 3 DEFAQTO M A P P I N G PruFund PruFund PruFund Growth PruFund PruFund 0-30 PruFund Cautious R I S K 2 DEFAQTO M A P P I N G Low 1 Risk Source: Defaqto, May 2018 R I S K DEFAQTO M A P P I N G It should be noted that the PruFund Cautious and PruFund Growth funds both have the flexibility within their structure to alter the overall level of risk they express and so require more frequent ongoing suitability checks. 12

13 The Risk Managed PruFund range is designed with different levels of investment risk and with specific equity exposure parameters. Advisers considering using a PruFund should be able to take their client s agreed risk profile and identify a suitably matched Risk Managed PruFund using the prescribed fund parameter and asset allocation framework. There is the ability for the adviser to move their client from one fund to another if the risk profile of the client were to alter during the course of ongoing, regular reviews. As both the asset allocation and fund mandates are established and monitored by PPMG, these funds represent a form of outsourced investment solution within a fund structure akin to a manager-ofmanagers strategy. The PruFund range used with ISAs is set out in Table 3. Table 3: ISA PruFund range Prudential fund name PruFund 0-30 ISA Fund PruFund ISA Fund PruFund ISA Fund Description These funds are risk managed by set equity allocation ranges, eg the 0-30 fund will contain a maximum of 30% allocated to equities PruFund ISA Fund PruFund Cautious ISA Fund PruFund Growth ISA Fund Fund targets cautious growth and currently invests around 70% in fixed income Fund aims to maximise growth over the long term; no upper limit set for allocation to equity 1 International funds are available in British pound, Euro and US dollar denominations. The PruFund range is invested in Prudential s main life fund which has existed since the 1950s, and has been using the tried and tested multi-asset allocation process since The two strategies share a common investment philosophy, but differ primarily in the way they are priced. The PruFund range was created to address the perceived lack of liquidity and opaqueness in withprofits funds. The key difference between each PruFund and a with-profits fund is that instead of receiving an annual bonus, the PruFund range has unit prices which are smoothed. The expected growth rate (EGR) is the annualised rate that is normally applied daily to the price of the fund. The PruFund will normally change in line with the EGR on a daily basis through the price of units held. It is worth noting that while this smoothed growth rate is annualised daily, the unit price will only deviate from the EGR under exceptional market circumstances. This is explained in more detail in the answer to Question 5. In basic terms, the PruFund range is smoothed quarterly, whereas the With-Profits Fund is smoothed over several years and priced through annual bonus payments. Consequently, the PruFund range does not require any market value reduction and therefore is priced more transparently. 13

14 Q2. What are the aims of the funds? The PruFund range uses a multi-asset strategy to aim for varying levels of return, given a selection of asset allocation and implied risk levels. This philosophy typically positions the PruFund range as being suited to those seeking capital growth and/or income while wishing to mitigate capital loss potential wherever possible. As such, the PruFund range can be considered appropriate for those wishing to have some controlled exposure to investment opportunities, but who will also typically have a moderate tolerance for investment volatility and any resultant loss to capital. It is worth remembering that the PruFund range contains commercial property and equity-based investments and therefore is only suitable for long-term investment strategies, say at least eight years. We recommend advisers evidence how individual and combined fund selection matches the client s needs and investment attitudes. Table 4 summarises the aims of the PruFund range as described in Prudential s fund factsheets. Table 4: Aims of PruFund range PruFund name PruFund Cautious PruFund Growth PruFund 0-30 PruFund PruFund PruFund Notes The fund aims for steady and consistent growth through a cautious approach to investing. The fund currently invests around 70% in a well-diversified portfolio of fixed interest securities and holdings of cash and money market instruments. The balance is invested in UK and international shares, property and alternative assets The fund aims to maximise growth over the medium to long term by investing in shares, property, fixed interest and other investments. The fund currently invests in UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments The fund aims to achieve long-term total return (the combination of income and growth of capital). The fund is actively managed, typically with a high exposure to lower risk assets, such as fixed interest securities and holdings of cash and money market instruments, with no more than 30% of the fund being invested in equities The fund aims to achieve long-term total return (the combination of income and growth of capital). The fund is actively managed, typically with a bias towards lower risk assets, such as fixed interest securities and holdings of cash and money market instruments, but will always have some exposure to equities, with between 10% and 40% of the fund being invested in equities The fund aims to achieve long-term total return (the combination of income and growth of capital). The fund is actively managed with a well-diversified exposure to UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments. From time to time, however, the portfolio may have a high exposure to equities and/or fixed income assets. Between 20% and 55% of the fund will be invested in equities The fund aims to achieve long-term total return (the combination of income and growth of capital). It is an actively managed fund with a well-diversified exposure to UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments. Typically, the fund will have a bias towards assets providing potential for growth, such as equities, with between 40% and 80% of the fund being invested in equities 14

15 Q3. Who are the team behind the PruFund range? Investment solutions provided by Prudential are carefully managed by the Prudential Portfolio Management Group (PPMG). PPMG is one of the largest and most well-resourced investment teams in the UK retail market. PPMG manages 180b (December 2017) across a range of multi-asset solutions and annuities on behalf of Prudential UK and Europe. PPMG works closely with Prudential to set the overarching strategic asset allocation framework for the multi-asset fund ranges of which they offer three: PruFund (with optional protection) Dynamic Portfolios Dynamic Focused Portfolios Assessing financial strength As advisers will be accessing these funds through the products, due diligence on the provider as well as the features the products offer will need to be considered. Financial strength is seen by many advisers as one of the key areas of due diligence when assessing the safety and security of their client s investment with a particular provider. The FSCS exists to protect clients' investments, to a certain level, in the event of an institution ceasing to trade. An adviser may also need to consider their ability to service the client, should there be issues with a provider. AKG is an actuarially based organisation specialising in the provision of independent ratings to the financial services industry. AKG ratings measure the financial strength of life and pension providers, though some consideration is also given to the commitment to a market and the wider parent ownership structure. These ratings are quite different from those issued by Moody s, Fitch and Standard & Poor s, which are credit ratings. In May 2018, AKG rated the individual trading divisions of Prudential as set out in Table 5. Table 5: AKG ratings Provider Wrapper Product Prudential Personal pension/self-invested personal pension (SIPP) Prudential Retirement Account Prudential Trustee investment plan (TIP) Prudential Trustee Investment Plan Prudential Prudential ISA Prudential ISA AKG rating A Prudential Onshore bond Prudential Investment Plan Prudential International International bond Prudential International Investment Bond B+ 15

16 Q4. What is the investment process behind the funds? 16 The process can be broken down into: Strategic asset allocation (SAA) Tactical asset allocation (TAA) Manager selection and oversight Portfolio management Strategic asset allocation The Long Term Investment Strategy sub-team recommends the SAA for each portfolio. As part of this they develop their own capital market assumptions for the expected returns, volatilities and correlations of the various asset classes covered. They then use Prudential s in-house economic scenario generator, GeneSIS, to carry out stochastic modelling based on these assumptions, which involves a full range of possible future asset allocations being mapped out. The SAAs are determined from these potential portfolios using the following principles: Customer outcomes ensure that expected customer outcomes are mapped to the fund s objectives Tailored risk appetite all portfolios have a bespoke SAA that is designed for the customer s specific needs, with any particular constraints taken into account Efficient risks and returns for a given risk appetite, PPMG will choose an asset allocation that generates the highest return Consistency across fund ranges within the stated fund objectives and risk appetite, ensure a consistent SAA across funds with a similar risk appetite and other similar funds Other constraints any other constraints, such as cost and liquidity Once the optimised SAA for each portfolio is created, it is then approved by Prudential Assurance Company (PAC) Board and any portfolio changes are implemented by the portfolio management team in PPMG. Tactical asset allocation TAA is where shorter-term house views around the SAAs can be reflected. These look 1 to 18 months ahead and are designed to focus on 3 types of mispricing opportunities: Macro relating to economic and market fundamentals Valuation based on PPMG s views of appropriate valuation parameters for the various asset classes and sub-asset classes they cover Behavioural resulting from short-term mispricing due to excess pessimism or optimism (leading to opportunity for reversal trades) or a clear trend that is likely to be sustained (leading to opportunity for momentum trades) Decisions can be based on a combination of more than one of the above, and PPMG s TAA investment philosophy is not to take a position unless they believe the mispricing to be significant or the opportunity has a high likelihood of being rewarded. Manager oversight The asset allocations are populated mainly through investing in segregated managers where possible and funds. The primary role of the Manager Oversight team is to ensure the continued suitability of the underlying managers. They also assess whether the funds held are performing in line with expectations.

17 The due diligence process combines quantitative factors, including measures of performance and holdings analysis, with qualitative analysis focused on the business, people, philosophy, process and infrastructure behind the fund. In particular, the following takes place at the below frequencies: Monthly monitoring includes the review of key exposures and holdings plus performance and attribution analysis. Quarterly performance reviews involve meeting the manager, either in person or by video conference. Each manager submits a Data Request Book prior to the meeting, which forms the basis of the meeting and enables PPMG to pinpoint areas that require further discussion. Annual due diligence consists of on-site manager meetings, where fund managers, analysts and other investment team members can be interviewed, plus other functions such as risk and operations examined. Investment activity and performance, as well as the health of the manager s business generally, are looked at. Portfolio management Portfolio management responsibilities can be split into the following areas: Keeping the funds in shape ensure the portfolios are managed in line with target exposures and limits while minimising cost and risk, adhere to agreed target TAA positions and manage cash flows and other fund dynamics Implementation ensure changes in SAA and TAA are implemented effectively and efficiently Operational management prepare and review trade instructions to minimise operational errors Portfolio monitoring review on an ongoing basis exposures, risks and performance in conjunction with PPMG Risk and Manager Oversight sub-teams and Morningstar Liquidity manage and report on this to ensure that outflows can be covered in stressed scenarios Hedge implementation ensure hedge programmes are managed against liability benchmarks by instructing and executing suitable derivatives within approved value at risk (VaR) limit Derivative documentation negotiate derivative International Swaps and Derivatives Association (ISDA) agreements and Credit Support Annexes (CSAs) with bank counterparties on an ongoing basis to maximise implementation efficiency Collateral management ensure that enough collateral is available to meet derivative collateral and margin requirements TAA review tactical opportunities with teams across PPMG, determine changes in TAA positioning and implement and monitor TAA exposures in conjunction with teams across PPMG 17

18 Q5. How do the funds work? Structure The PruFund range invests in the same assets and funds as Prudential s main life fund, albeit with different asset allocations and fund aims. Smoothing process A smoothing process is applied to each PruFund. This process is designed to reduce the impact of short-term market movements, up and down, using an automated process to smooth investment returns. Step Notes 1 The client s investment is first retained in a PruFund holding account before being switched to the client s chosen fund on the next PruFund quarter date (typically 25 February, May, August and November) During the holding period the client s investment will increase daily in line with the EGR applicable and product charges will be applied. The investment will not be subject to any smoothing adjustments or suspension of smoothing 2 Prudential uses the terms smoothed and unsmoothed when referring to the unit prices of each PruFund: The smoothed price is the unit price and normally increases daily at the EGR rate The unsmoothed price is the value of the investments in each fund divided by the total number of units in that fund To protect investors, Prudential will not disclose the unsmoothed price to avoid speculation over potential price adjustments 3 The difference between the smoothed and unsmoothed prices is checked on a daily basis. If the unsmoothed price differs from the smoothed price by 10% or more, based on both the actual unsmoothed price and a five-day rolling average of the unsmoothed price, then the smoothed price will be adjusted immediately to reduce this difference to 2.5% 4 If the unsmoothed price at the quarter date differs from the smoothed price by 5% or more, the smoothed price is moved 50% of the way to the unsmoothed price If necessary, this adjustment is repeated until the gap is to within 5% 5 Adjustments can be made up or down depending on whether the smoothed price is too far above or below the unsmoothed price. After any adjustments have been made, the smoothed price will continue to increase at the EGR for the quarter 6 In certain circumstances, Prudential may temporarily suspend the smoothing process to protect the main life fund and the clients invested in it. This can be applied independently for each fund in the PruFund range The individual fund s performance is not a deciding factor in whether the smoothing process is applied to that fund. Large values of investments entering or leaving the fund could mean that the client s investments would not be smoothed 18

19 EGRs The EGRs that are to be applied to the PruFund range of funds are set on a quarterly basis by PAC directors. They take into account the expected long-term investment returns on the assets of each fund. The EGR that applies to each fund is the annualised rate, which will be applied daily to increase the unit price of that fund. The EGRs may be higher, the same, or lower than those applying at the start of the client s investment. Additionally, there may be times where the unit price may be adjusted, which will affect any growth that the client may receive. The overall return achieved is affected by the amount of the investment performance, the period over which the plan has been invested and the charges applicable to the plan. Table 6 shows the EGRs applied to the Prudential ISA. Table 6: EGRs ISA PruFund Prudential ISA PruFund EGR PruFund 0-30 Fund 5.1% PruFund Fund 5.5% PruFund Fund 6.1% PruFund Fund 6.3% PruFund Cautious Fund 5.5% PruFund Growth 6.2% Source: Prudential, 25 May 2018 While these returns look positive, it is worth noting they are not unusual. Looking specifically at the PruFund Growth fund, for example, Table 7 shows the historical ISA rates for this fund. Table 7: Historical EGR of PruFund Growth Prudential ISA From To EGR 26/02/ /02/ % 25/02/ /05/ % 25/05/ /08/ % 25/08/2016 Present 5.10% Source: Prudential, 25 May

20 Experience of smoothing The use of the smoothing tool should be seen as a good thing; it shows that the mechanism is working and benefiting long-term investors. By way of example, Table 8 lists the unit price adjustments (UPAs) that have been applied to the PruFund Growth ISA funds. Table 8: Historical unit price adjustments of the PruFund Growth Prudential ISA Date UPA 26/05/ % End 26/02/ % End 26/11/ % End 27/02/ % End Source: Prudential, 25 May 2018 End or mid-term adjustment 20

21 Q6. How can the funds be accessed? The PruFund range can be accessed through the Prudential products shown in Tables 9 and 10. Table 9: Accessing the PruFund range through Prudential products and their location on Defaqto Engage Provider Product Location on Defaqto Engage Prudential Prudential International Prudential ISA Prudential Retirement Account Trustee Investment Plan Prudential Investment Plan Prudential International Investment Bond Investment ISA PPP, SIPP, PPP transfer, Income drawdown Trustee Investment Plan Unit Linked Bond, Onshore With-Profits Bond International bonds Table 10: Accessing the specific PruFund through Prudential products Fund Prudential ISA Prudential Retirement Account Prudential Investment Plan Prudential International Investment Bond Prudential Flexible Retirement Plan Prudential Trustee Investment Plan Defaqto Star Rating PruFund 0-30 PruFund PruFund PruFund PruFund Cautious PruFund Protected Cautious PruFund Growth PruFund Protected Growth 21

22 Q7. What are the fund charges? It is important to understand the adviser charging terms available through each product provider. The key points for the Prudential ISA are: No initial charge No annual product charge Fund charges of 1.20% Free switches* *terms and conditions applicable It is important to appraise the charges levied on the fund and/or investment solution under consideration and to gauge the potential impact on returns. If a product wrapper and/or platform is being utilised, these charging structures should also be appraised. Notes: Other charges may be payable, including for fund switches The total cost experience and individual terms and conditions, and charges involved in accessing funds in the PruFund range may vary when used within other Prudential product wrappers 22

23 Q8. How should the funds be assessed and compared? Assessing the PruFund range Each PruFund invests in the same assets and funds as Prudential s main life fund, albeit with different asset allocations and fund aims. Table 11 sets out how to assess the PruFund range. Table 11: Assessing the PruFunds Meeting a range of needs Matching investment return requirements Assessing attitude to risk, capacity for loss and required return Mitigating investment market volatility Reducing the impact of withdrawals in falling markets Managing risk and equity exposure in the approach to retirement The PruFund range can be used to meet a range of needs. They are most suitable for long-term, risk-averse investors. They can be used to support accumulation and decumulation strategies The availability of these funds within Prudential tax wrappers means that advisers can also use these funds in holistic financial planning The EGR approach can help advisers and clients to better understand their potential investment returns and thereby enhance planning and targeting For example, an EGR can be matched to a given level of income being taken from the plan (please note that EGRs may decrease in the future) The FCA s guidance consultation, Assessing suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection, urges advisers to improve client risk profiling exercises by evaluating capacity for loss in addition to attitude to risk Subjects to consider include: Attitude to risk Capacity for loss Required return The PruFund range can be used to tie in with the risk profiling analysis The multi-asset approach adopted by PPMG can also contribute to de-risking client investment portfolios The smoothing processes and risk framework employed may also help to reduce the threat of clients experiencing negative pound cost averaging where income is being drawn, ie the negative impact of taking income when funds are falling (or have fallen) due to market volatility crystallising any investment losses Automatic disinvestment and life-styling mechanisms have been used within tax wrappers to protect client investments from market downturns by moving assets out of equity markets and into cash and gilts in the approach to retirement Potential downsides to this approach are that clients may be less likely to benefit from market gains and the automated nature of these procedures may lack flexibility Advisers should monitor their client s attitude to risk, capacity for loss, required return and evolving personal circumstances on a regular basis activity encouraged through FCA guidance and, where necessary, the PruFund risk managed framework can be used to move the client up or down the risk scale in order to maintain suitability 23

24 Comparing the PruFund range In terms of making high-level comparisons with other funds, the starting point for many advisers will be the sector classification of each PruFund. The range comprises life and pension funds, which are classified by the Association of British Insurers (ABI). Unfortunately, all the PruFund range falls within the ABI s unclassified sector. Due to the wide variety of different fund types present within the unclassified sector, Defaqto suggests that advisers seek to make comparisons with other pertinent sectors, such as the ABI mixed investment categories where funds with similar equity weightings can be found. While individual funds in the PruFund range may be compared with other specific funds in relevant sectors, it is important for advisers to consider some of the wider and established attributes of the proposition when seeking to make comparisons; eg, the use of price smoothing or the type of tax wrapper used. This may include comparisons with other multi-asset funds and other forms of outsourced investment solutions. Advisers should be aware of and consider that the smoothing effect can create benefits in the short and medium terms, but it does make performance comparison difficult. Over the longer term, based on the equity content of each of the funds, the PruFund range can logically be compared to the relevant ABI mixed investment sectors. For example, the Risk Managed PruFund 0-30 fund can be compared to performance in the ABI mixed investment 0-35 shares sector. 24

25 Q9. What ISA governance and administration are used? The ISA plan manager is Link Financial Investments Limited, which is responsible for all regulatory and legal aspects of the ISA and provides all customer servicing. Link Administration Holdings Limited (Link Group) purchased the previous plan manager Capital Asset Services in July Link Group has two specific roles: To ensure the ISA and underlying investments remain compliant with legislation and regulations To process applications and ongoing administration requests correctly, compliantly and within approved timescales Due to Link Financial Investments Limited being the ISA manager, Prudential ISA documentation will begin to move from being Capita branded to Link Group branded and the Prudential logo will appear on some items, such as application forms. One drawback of using third-party administration is the delay some may experience between submitting an application form and the money being invested. 25

26 Q10. How have the funds performed? Advisers may wish to appraise funds under consideration by analysing their past performance and their ability to meet objectives. While past performance is not a guide to future returns, it is a key indicator of the fund s ability to deliver against its stated objectives, to match sector benchmarks or key indices, and to compete with its peers. While the PruFund Cautious and Growth Funds are categorised within the ABI s unclassified sector, a more logical appraisal of their performance may be conducted through comparison with relevant ABI mixed investment sector benchmarks. This is the approach adopted by Defaqto within this section of our review, which illustrates fund performance since the launch of these funds against the closest ABI sector based on average equity exposure. The Risk Managed PruFund range is designed with different levels of investment risk and with specific equity exposure parameters. It is therefore interesting for advisers to keep abreast of how such a family of funds with defined equity parameters perform against each other. This is also illustrated for the Risk Managed PruFund range at the end of this document. The following performance data is shown net of local taxes and gross of all other charges. 26

27 PruFund Cautious Pension ISA ISIN code: GB00BQQFXB23 Fund description The fund aims for steady and consistent growth through a cautious approach to investing. The fund currently invests around 70% in a well-diversified portfolio of fixed interest securities and holdings of cash and money market instruments. The balance is invested in UK and international shares, property and alternative assets. Distribution weightings UK Equities 11.8% North American Equities 4.5% European Equities 4.3% Japanese Equities 2.2% Pacific Market Equities 5.4% Global Emerging Markets Equities 1.9% Property 6.5% UK Fixed Interest 20% Euro Fixed Interest 10.8% US Fixed Interest 20.5% Asia Fixed Interest 5.4% Other Fixed Interest 1.5% Other Investment Assets 3.1% Cash 2.1% Source: Prudential, 31 March 2018 Performance analysis Source of performance data: Financial Express (FE). Please remember that past performance is not a reliable indicator of future performance. The figures are intended only to demonstrate performance history of the fund and include a representative fund charge of 0.65% pa and any additional investment expenses. They take no account of product or advice charges. Some, if not all, of the funds comprising the ABI sector averages are net of fund charges. The application of charges may impact the overall performance. The value of your client s investment can go down as well as up and the amount your client gets back may be less than they put in. Performance is shown on a bid to bid basis. 27

28 PruFund Growth Pension ISA ISIN code: GB00BQQFX900 Fund description The fund aims to maximise growth over the medium to long term by investing in shares, property, fixed interest and other investments. The fund currently invests in UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments. Distribution weightings UK Equities 18.2% North American Equities 8.3% European Equities 8.3% Japanese Equities 3.8% Pacific Market Equities 9.5% Global Emerging Markets Equities 3.4% Property 14.5% UK Fixed Interest 8.7% Euro Fixed Interest 4.7% US Fixed Interest 10.1% Asia Fixed Interest 2.6% Other Fixed Interest 0.8% Other Investment Assets 5.7% Cash 1.4% Source: Prudential, 31 March 2018 Performance analysis 28 Source of performance data: Financial Express (FE). Please remember that past performance is not a reliable indicator of future performance. The figures are intended only to demonstrate performance history of the fund and include a representative fund charge of 0.65% pa and any additional investment expenses. They take no account of product or advice charges. Some, if not all, of the funds comprising the ABI sector averages are net of fund charges. The application of charges may impact the overall performance. The value of your client s investment can go down as well as up and the amount your client gets back may be less than they put in. Performance is shown on a bid to bid basis.

29 PruFund 0-30 Pension ISA ISIN code: GB00BQQFX561 Fund description The fund aims to achieve long-term total return (the combination of income and growth of capital). The fund is actively managed, typically with a high exposure to lower risk assets, such as fixed interest securities and holdings of cash and money market instruments, with no more than 30% of the fund being invested in equities. Distribution weightings UK Equities 6% North American Equities 3.5% European Equities 3.5% Japanese Equities 1.6% Pacific Market Equities 4% Global Emerging Markets Equities 1.4% Property 10% UK Fixed Interest 20.5% Euro Fixed Interest 11% US Fixed Interest 23.6% Asia Fixed Interest 1.9% Other Fixed Interest 0.8% Cash 7% Source: Prudential, 31 March 2018 Performance analysis Source of performance data: Financial Express (FE). Please remember that past performance is not a reliable indicator of future performance. The figures are intended only to demonstrate performance history of the fund and include a representative fund charge of 0.65% pa and any additional investment expenses. They take no account of product or advice charges. Some, if not all, of the funds comprising the ABI sector averages are net of fund charges. The application of charges may impact the overall performance. The value of your client s investment can go down as well as up and the amount your client gets back may be less than they put in. Performance is shown on a bid to bid basis. 29

30 PruFund Pension ISA ISIN code: GB00BQQFX678 Fund description The fund aims to achieve long-term total return (the combination of income and growth of capital). The fund is actively managed, typically with a bias towards lower risk assets, such as fixed interest securities and holdings of cash and money market instruments, but will always have some exposure to equities, with between 10% and 40% of the fund being invested in equities. Distribution weightings UK Equities 9.4% North American Equities 5.4% European Equities 5.4% Japanese Equities 2.6% Pacific Market Equities 6.3% Global Emerging Markets Equities 2.3% Property 13.7% UK Fixed Interest 16.1% Euro Fixed Interest 8.7% US Fixed Interest 18.5% Asia Fixed Interest 4.7% Other Fixed Interest 1.4% Cash 5.5% Source: Prudential, 31 March 2018 Performance analysis 30 Source of performance data: Financial Express (FE). Please remember that past performance is not a reliable indicator of future performance. The figures are intended only to demonstrate performance history of the fund and include a representative fund charge of 0.65% pa and any additional investment expenses. They take no account of product or advice charges. Some, if not all, of the funds comprising the ABI sector averages are net of fund charges. The application of charges may impact the overall performance. The value of your client s investment can go down as well as up and the amount your client gets back may be less than they put in. Performance is shown on a bid to bid basis.

31 PruFund Pension ISA ISIN code: GB00BQQFX785 Fund description The fund aims to achieve long-term total return (the combination of income and growth of capital). The fund is actively managed with a well-diversified exposure to UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments. From time to time, however, the portfolio may have a high exposure to equities and/or fixed income assets. Between 20% and 55% of the fund will be invested in equities. Distribution weightings UK Equities 13% North American Equities 7.5% European Equities 7.5% Japanese Equities 3.4% Pacific Market Equities 8.7% Global Emerging Markets Equities 3.1% Property 16.7% UK Fixed Interest 11.7% Euro Fixed Interest 6.3% US Fixed Interest 13.5% Asia Fixed Interest 3.4% Other Fixed Interest 1.2% Cash 4% Source: Prudential, 31 March 2018 Performance analysis Source of performance data: Financial Express (FE). Please remember that past performance is not a reliable indicator of future performance. The figures are intended only to demonstrate performance history of the fund and include a representative fund charge of 0.65% pa and any additional investment expenses. They take no account of product or advice charges. Some, if not all, of the funds comprising the ABI sector averages are net of fund charges. The application of charges may impact the overall performance. The value of your client s investment can go down as well as up and the amount your client gets back may be less than they put in. Performance is shown on a bid to bid basis. 31

32 PruFund Pension ISA ISIN code: GB00BQQFX892 Fund description The fund aims to achieve long-term total return (the combination of income and growth of capital). It is an actively managed fund with a well-diversified exposure to UK and international equities, property, fixed interest securities, index-linked securities and other specialist investments. Typically, the fund will have a bias towards assets providing potential for growth, such as equities, with between 40% and 80% of the fund being invested in equities. Distribution weightings UK Equities 16.9% North American Equities 9.8% European Equities 9.8% Japanese Equities 4.5% Pacific Market Equities 11.3% Global Emerging Markets Equities 4.1% Property 18.7% UK Fixed Interest 7.3% Euro Fixed Interest 3.9% US Fixed Interest 8.4% Asia Fixed Interest 2.1% Other Fixed Interest 0.7% Cash 2.5% Source: Prudential, 31 March 2018 Performance analysis 32 Source of performance data: Financial Express (FE). Please remember that past performance is not a reliable indicator of future performance. The figures are intended only to demonstrate performance history of the fund and include a representative fund charge of 0.65% pa and any additional investment expenses. They take no account of product or advice charges. Some, if not all, of the funds comprising the ABI sector averages are net of fund charges. The application of charges may impact the overall performance. The value of your client s investment can go down as well as up and the amount your client gets back may be less than they put in. Performance is shown on a bid to bid basis.

33 Appendix ABI sector classifications Unclassified This sector is for funds that do not provide sufficient data to be monitored, and consequently cannot be compared on a like-forlike basis. Mixed investment 0% 35% shares Funds in this sector are required to have a range of different investments. Up to 35% of the fund can be invested in company shares (equities). At least 45% of the fund must be in fixed income investments (eg corporate and government bonds) and/or cash investments. Cash can include investments such as current account cash, short-term fixed income investments and certificates of deposit. Maximum 35% equity exposure (including convertibles) No minimum equity requirement Minimum 45% investment grade fixed income and cash Minimum 80% investment in established market currencies (US Dollar, British Pound and Euro) of which 40% must be sterling Sterling requirement includes assets hedged back to sterling Mixed investment 20% 60% shares Funds in this sector are required to have a range of different investments. The fund must have between 20% and 60% invested in company shares (equities). At least 30% of the fund must be in fixed income investments (eg corporate and government bonds) and/or cash investments. Cash can include investments such as current account cash, short-term fixed income investments and certificates of deposit. Mixed investment 40% 85% shares Funds in this sector are required to have a range of different investments. However, there is scope for funds to have a high proportion in company shares (equities). The fund must have between 40% and 85% invested in company shares. Maximum 85% equity exposure (including convertibles) Minimum 40% equity exposure No minimum fixed income or cash requirement Minimum 50% investment in established market currencies (US Dollar, British Pound and Euro) of which 25% must be sterling Sterling requirement includes assets hedged back to sterling Flexible investment The funds in this sector are expected to have a range of different investments. However, the fund manager has significant flexibility over what to invest in. There is no minimum or maximum requirement for investment in company shares (equities) and there is scope for funds to have a high proportion of shares. The manager is accorded a significant degree of discretion over asset allocation and is allowed to invest up to 100% in equities at their discretion. No minimum equity requirement No minimum fixed income or cash requirement No minimum currency requirement Maximum 60% equity exposure (including convertibles) Minimum 20% equity exposure Minimum 30% fixed income and cash Minimum 60% investment in established market currencies (US Dollar, British Pound and Euro) of which 30% must be sterling Sterling requirement includes assets hedged back to sterling 33

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35 About Defaqto Defaqto is an independent financial information business, helping financial institutions and consumers make better informed decisions. Our experts research, collect and continuously assess over 41,000 financial products. Our process is extremely robust and is driven by over 60 specialist analysts who have unparalleled knowledge of financial products, services and funds in the market. Our independent fund and product information helps banks, insurers and fund managers with designing and promoting their propositions. Defaqto Ratings Defaqto Star Ratings are the most trusted expert assessment of products in the market. Products can receive a Rating of 1 to 5, depending on the quality and comprehensiveness of the features they offer; a 1 Star Rating indicates a basic product, while a 5 Star Rating indicates one of the highest quality products in the market. Star Ratings provide consumers, advisers and brokers with an accurate benchmark so that they can see at a glance how products and policies in the market compare. A Diamond Rating reflects the performance of a managed fund or fund family. Funds or fund families can receive a Rating of 1 to 5 based on a detailed and well-structured scoring process, allowing advisers and other intermediaries and their clients to see instantly where they sit in the market in terms of fund performance and competitiveness in areas such as fees, scale, access and manager longevity. A 5 Diamond Rating indicates it is one of the best quality funds available in the market. Service Ratings provide advisers with a simple and unbiased assessment of provider service. Based on advisers perceptions of the service they receive, providers are rated Gold, Silver, Bronze. Risk Ratings use the projected volatility of a fund using asset allocation and historic volatility, based on observed standard deviations to map a fund to a Defaqto Risk Profile. Risk Profile 10 indicates highest risk and Risk Profile 1 represents lowest risk. Income Risk Ratings are unique to the market, comparing fund objectives, asset allocations, income and capital volatilities, and maximum drawdown. The Ratings are mapped to four Income Risk Profiles based on the income required and the level of risk. They are: capital preservation, low income volatility, medium income volatility, high income volatility. 35

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