Defaqto Q&A Review. Prudential PruFunds Unit Linked Bonds

Transcription

1 Defaqto Q&A Review Prudential PruFunds Unit Linked Bonds January 2014

2 Table of contents 1. Introduction Defaqto Q&A review What types of funds are available within the PruFund range? What are the aims of the PruFunds? Who is the team behind PruFunds? What is the investment process behind PruFunds?... 7 PruFund Asset Allocation... 7 PruFund Asset and Stock Selection... 7 PruFund Governance How do PruFunds work?... 9 PruFund Structure... 9 PruFund Smoothing Process... 9 PruFund Expected Growth Rate How should PruFunds be approached and compared? Approaching PruFunds and unit linked bonds (onshore or offshore) Comparing PruFunds How have the PruFunds been performing? PruFund Cautious Fund (life fund) three year performance PruFund Cautious Fund (life fund) performance since launch PruFund Growth Fund (life fund) three year performance PruFund Growth Fund (life fund) five year performance PruFund Growth Fund (life fund) performance since launch Are guarantees available on PruFunds? Within which unit linked bond wrappers can PruFunds be used? What charges are levied on PruFunds and the unit linked bond? Appendix A Risk Managed PruFund Performance Analysis PruFund 0-30 Fund performance since launch PruFund Fund performance since launch PruFund Fund performance since launch PruFund Fund performance since launch Appendix B ABI Sector Classifications About Defaqto Defaqto Limited 2

3 1. Introduction Prudential has commissioned Defaqto to carry out an independent fact-based review of the PruFund proposition. The objective of this report is to enable advisers to gain an enhanced understanding of PruFunds' core investment features, processes and market positioning in order that advisers can better appraise the potential suitability of the fund proposition for their clients. The report considers the application of PruFunds within a unit linked bond wrapper, onshore and offshore. This review is carried out in the format of a Question and Answer (Q&A) report in which Defaqto proposes ten key questions. While some of the questions are specific to the make-up of PruFunds, many can equally be applied by advisers when carrying out due diligence on other funds and investment solutions and gauging their potential suitability for clients. The ten questions about PruFunds What type of funds are they? What are the aims of the funds? Who is the team behind the funds? What is the investment process behind the funds? How do the funds work? How should the funds be approached and compared? How have the funds performed? Are guarantees available on the funds? How can the funds be accessed? What are the fund charges? These questions are answered by Defaqto based on the terms and conditions of the PruFund fund range. The Q&A review was conducted using the full suite of Prudential s adviser and client facing marketing literature and information made available on the Prudential adviser extranet during the preparation of the report. Defaqto has also had access to a senior representative of Prudential s Portfolio Management Group (PMG). 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. This report does not represent a recommendation of PruFunds or Prudential s products and Defaqto would encourage advisers to conduct their own suitability processes before selecting fund or product solutions for their client. Defaqto Limited 3

4 2. Defaqto Q&A review Defaqto believes that it is important for advisers to conduct a detailed due diligence process when selecting investment solutions for their clients. Once the fact-finding and risk profiling processes have been completed it is vital for the adviser to 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 that the investment fund or solution meets the needs and risk tolerance of the client and also to ensure that it dovetails with the adviser s preferred investment approach and processes. 2.1 What types of funds are available within the PruFund range? Defaqto s Q&A review covers the funds listed in Table 1. The Life versions of the PruFund Cautious and PruFund Growth Funds were launched on 25 th August 2009 and 25 th November 2004 respectively, while the range of Risk Managed PruFunds was launched on 25 th November Risk Managed PruFunds PruFunds without guarantees PruFunds with guarantees PruFund 0-30 Fund PruFund Cautious Fund PruFund Protected Cautious Fund PruFund Fund PruFund Growth Fund PruFund Protected Growth Fund PruFund Fund PruFund Fund Table 1 Prudential PruFunds covered within Defaqto Q&A review PruFunds are classified as multi-asset funds, meaning that each fund consists of a portfolio constructed with a diversified asset mix which is designed to reduce investment volatility for the client over the longer term. The asset allocation framework for each fund is established and monitored by Prudential s PMG. It is important therefore for advisers to understand that PruFunds present a form of outsourced investment solution within a fund structure. The Risk Managed PruFunds are designed with different levels of investment risk and with specific equity exposure parameters. Advisers considering PruFunds will be able to take their client risk profiling output and identify a suitably matched Risk Managed PruFund for the client using the prescribed fund parameter and asset allocation framework. Defaqto Limited 4

5 2.2 What are the aims of the PruFunds? When appraising the potential suitability of investment solutions for their clients it is important for advisers to consider and understand the aims and objectives of a fund. This should not only form part of the initial fund selection process, following on from the client fact-find and appraisal of attitude to investment risk and capital loss, but should also form part of the regular review process. The adviser should ensure that the fund is remaining true to its stated objectives and that these objectives are still meeting those of the client. Table 2 confirms the aims of each of the PruFunds covered within this Defaqto review, as described within each of the Prudential fund factsheets. Fund PruFund Cautious Fund PruFund Protected Cautious Fund PruFund Growth Fund PruFund Protected Growth Fund PruFund 0-30 Fund PruFund Fund PruFund Fund PruFund Fund Fund Aim 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. Table 2 Prudential PruFund investment aims The multi-asset approach and use of smoothing processes (see Section 2.5), as well as the guarantees (see Section 2.8) available on the PruFund Cautious Fund and PruFund Growth Fund, mean that the PruFund proposition is typically aimed at more cautious clients. It is specifically targeted at those clients who wish to have some exposure to equity markets but do not wish to experience high levels of investment volatility. Furthermore it is designed to meet long term investment needs. The Expected Growth Rate (EGR) declarations made by Prudential for the PruFund range also provide advisers with a method of tracking the performance of these funds against their aims and objectives. Defaqto Limited 5

6 2.3 Who is the team behind PruFunds? It is important for the adviser to understand the team and resource behind the investment solution, especially where they are seeking to outsource some elements of the investment process to the fund management group. The PruFund range of funds is constructed, monitored and reviewed by Prudential s PMG which controls billion of Prudential s Investments (as at 30th June 2013). Prudential s PMG is the team of in-house investment strategists and manager of managers for the Prudential Group in the UK which operates independently of the various underlying asset management businesses within the Prudential Group. PMG has governance responsibility for each of the Prudential Group fund management companies M&G, Eastspring Investments, PPM America, M&G Real Estate and PPM South Africa. The PMG is made up of four core teams and comprises over 25 economists, investment strategists, analysts and mathematicians who are specialists in different areas of the investment world. The responsibilities of each PMG team and key personnel are outlined in Table 3. Prudential PMG Teams Team Responsibilities Key Team Personnel Portfolio Management Team Risk and Oversight Team Financial Modelling Team Day to day running of Multi-Asset funds Management of cashflow Regular interactions with Prudential Group fund managers Reporting to relevant Prudential oversight committees Collating data to enable PMG s monitoring of the Group s asset managers Ensuring that procedures and controls operating within PMG are sound Ensuring that appropriate standards of documentation are maintained within PMG Monitoring interplay between investment markets Understanding how investment markets and fund liabilities may interact Producing the assumptions and economic scenarios upon which Prudential Group s solvency position is assessed Producing the assumptions and economic scenarios which are used to inform the Strategic Asset Allocation decision Directors of Portfolio Management Matthew Williams Philip Butler Phil Brookes Alternatives Analyst Haran Arumugam Director of Quantitative Analysis Martin Cumberworth Director of Quantitative Research Parit Jakhria Unit Linked Team Operations, governance, analysis and efficiency management for Prudential s unit linked and collective fund businesses Funds managed by Prudential s internal managers and those managed by third parties Investment Director Andy Brown Table 3 Prudential Portfolio Management Group Responsibilities and Key Personnel Defaqto Limited 6

7 2.4 What is the investment process behind PruFunds? It is important for the adviser to understand the investment process behind the fund or investment solution, including asset and stock selection and the ongoing fund governance processes adopted by the fund management group. PruFund Asset Allocation Prudential s PMG is responsible for the establishment and ongoing management of the asset allocation models within each of the PruFunds. The adviser is therefore able to buy into Prudential PMG s asset allocation and portfolio construction resource and experience. Table 4 details the high level asset allocation framework for the four Risk Managed PruFunds. Asset Allocation PruFund 0-30 PruFund PruFund PruFund Cash 15% 10% 8% 6% Fixed Interest 55% 50% 40% 25% Property 9% 8% 9% 10% Overseas Equity 13% 24% 33% 44% UK Equity 8% 8% 10% 15% Table 4 High level asset allocation models of Risk Managed PruFunds (as at 30 th September 2013) Details of the high level asset allocation framework for the PruFund Cautious and PruFund Growth Funds are provided in Table 9, Section 2.8 of this review. PruFund Asset and Stock Selection Once the asset allocation structure has been set for each of the PruFunds the PMG is then responsible for portfolio construction and ongoing high level management of the PruFunds proposition. This essentially takes the form of a manager of managers operation where Prudential s PMG mandates asset and stock selection to fund managers around the world. Where appropriate the PMG makes use of fund management capability from within the Prudential Group, but external managers are also used where specific asset, stock or geographical expertise is required to fulfil an investment mandate. Prudential is in a strong position to negotiate competitive rates for the management of these mandates which form part of the PruFund portfolios. Defaqto Limited 7

8 PruFund Governance Prudential s PMG has adopted a rigorous set of governance procedures to underpin the ongoing monitoring and management of the various investment processes within the PruFund proposition, including investment mandates held with internal and external fund managers. Prudential PMG Controls 1. Compliance and limit monitoring 2. Best practice monitoring 3. Performance review 4. Investment due diligence Control Process Where PMG creates a fund mandate which includes specific limits (e.g. an equity fund should hold no more than 5% in cash), these limits are monitored for breaches daily, with PMG reviewing any breaches monthly. Additionally PMG monitors key exposures in funds on a monthly basis in order to identify any issues. This monthly process results in a number of conversations about focus, approach and existing holdings between PMG and the underlying managers. PMG also has quarterly meetings for managers to present on standard topics such as the performance being achieved, key risk positions and changes in holdings over the quarter. These meetings are typically held in person for those managers based in London and by phone or video conference for those managers based overseas. For key fund managers, where the largest sums of money are invested, PMG has an in-depth process to review their approach to running money on an annual basis. From 2011 PMG has being doing alternate years of: Site visits face to face interviews carried out by PMG representatives, which leads to comprehensive feedback to the asset management company: Questionnaire this requires fund managers to evidence what they do and why in full written format, and allows PMG to review processes in a different way to site visits. Control Frequency Daily Monthly Quarterly Annual Table 5 Prudential Portfolio Management Group PruFund governance and control processes Defaqto Limited 8

9 2.5 How do PruFunds work? It is important for the adviser to comprehend the structure and mechanics of the fund or investment solution that is under consideration. The PruFund proposition has a range of functions which need to be understood. PruFund Structure Each PruFund invests in assets of Prudential s main With-Profits Fund, but the PruFunds have different asset allocations and fund aims. Within each high level asset type, e.g. international equities or fixed interest, the amount held in different types of that asset is driven by the proportion held in the main With-Profits Fund. Separate and auditable Guarantee and Smoothing Accounts are held within and backed by Prudential s With- Profits Fund. Prudential follows strict principles, prescribed by the regulator, to govern and manage their With Profits Fund in order to safeguard its policyholders and PruFund investors will also benefit from this approach. PruFund Smoothing Process A transparent smoothing formula applies to PruFunds and this process is designed to reduce the impact of short-term market movements by using an automated process to smooth investment returns. Smoothing Accounts held within Prudential s With-Profits Fund will meet the smoothing profit and losses. PruFund Investment Smoothing Process Step 1 The client s investment is first held in a holding PruFund Account before being switched to the client s chosen fund on the next PruFund Quarter Date (typically the 25th February, 25th May, 25th August and 25th November). During the holding fund period the client s investment will increase daily in line with the Expected Growth Rate (EGR) applicable and product charges will be applied. The investment will not be subject to any smoothing adjustments or suspension of smoothing. Step 2 Prudential uses the terms smoothed and unsmoothed when referring to the unit prices of each PruFund. The unit price is known as the smoothed price which 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. In order to protect investors Prudential will not disclose the unsmoothed price to avoid speculation over potential price adjustments. Step 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 5-day rolling average of the unsmoothed price, then the smoothed price will be adjusted immediately to reduce this difference to 2.5%. Step 4 If the unsmoothed price at the quarter date differs from the smoothed price by 5% or more, either above or below, the smoothed price is moved 50% of the way to the unsmoothed price. If necessary this adjustment is repeated until the gap is within 5%. Step 5 Adjustments could 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. Step 6 In certain circumstances Prudential may temporarily suspend the smoothing process in order to protect the With- Profits 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, or not, to that fund. Large values of investments entering or leaving the fund could mean that the client s investments would not be smoothed. Table 6 PruFund investment smoothing process As an example of the smoothing process in action, Prudential has made five unit price adjustments four upwards and one downward to the PruFund Growth Fund from 25th February 2009 to 25th February Defaqto Limited 9

10 PruFund Expected Growth Rate Prudential announces the EGRs that apply to the PruFund Range of Funds every quarter. The EGR which applies to each fund is the annualised rate which will be applied daily to increase the unit price of that fund. The EGRs are set on a quarterly basis by the Prudential Assurance Company (PAC) Ltd Directors and take into account the expected long-term investment returns on the assets of each fund. The EGRs set at each quarter date 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 impact on any growth that the client may receive. The overall return achieved is affected by the amount of the investment, investment performance, the period over which the plan has been invested and the charges applicable to the plan. Where Prudential experiences large investments into or encashments from the fund, they reserve the right to not apply the smoothing process. This is known as the suspension of smoothing and if enforced will lead to the unit price increasing or decreasing daily in line with the value of the underlying investments. Suspension of smoothing can be applied independently for each fund in the PruFund Range of Funds. Prudential s current EGRs, quoted in Table 7, are shown gross of all unit linked bond product charges, including AMCs. PruFund Growth Fund PruFund Protected Growth Fund PruFund Cautious Fund PruFund Protected Cautious Fund PruFund Growth (Sterling) Fund PruFund Protected Growth Fund PruFund Cautious (Sterling) Fund PruFund Protected Cautious Fund Life Onshore Bond Life Onshore Bond Life Offshore Bond Life Offshore Bond Expected Growth Rate 6.20% 5.70% 7.50% 7.00% Table 7 Expected Growth Rates for PruFund Growth, Protected Growth, Cautious and Protected Cautious Funds Please note that there are also Euro and US Dollar versions of PruFund Growth and PruFund Cautious within the offshore bond structure. Prudential s current EGRs, quoted in Table 8, are shown gross of all unit linked bond product charges, including AMCs. PruFund 0-30 Fund PruFund Fund PruFund Fund PruFund Fund Life Onshore Bond Life Onshore Bond Life Onshore Bond Life Onshore Bond Expected Growth Rate 5.60% 5.90% 6.10% 6.40% Table 8 Expected Growth Rates for Risk Managed PruFunds Financial advisers can keep abreast of current and historic PruFund EGRs and Unit Price Adjustments at Defaqto Limited 10

11 2.6 How should PruFunds be approached and compared? Approaching PruFunds and unit linked bonds (onshore or offshore) Collectives vs insured unit linked bonds The benefits of the client investing directly via collectives or through an insured unit linked bond are often debated. Both approaches have their merits for different client circumstances (and the adviser should ensure that they explore these), but the type of smoothing mechanisms and processes employed within PruFunds are unlikely to be available to retail clients via collectives. The structure of PruFunds and the use of Prudential s balance sheet and reserves to support this proposition can only really work in an insured fund environment. Taxation position on onshore bonds There is no personal liability to capital gains tax or basic rate income tax on proceeds from onshore bonds because the underlying investment fund itself is subject to tax, equivalent to basic rate tax. The bondholder is allowed to assume that the life company has deducted the equivalent of basic rate tax, but the actual rate deducted can vary and may be lower than 20%. The impact of this taxation position is that the net gain does not need to be grossed up for a higher rate taxpayer and so the eventual liability will be lower than 40% and is likely to be closer to the 28% CGT rate. This approach within onshore bonds may also present opportunities for those clients subject to higher rate CGT. Client migration planning opportunities Clients who are planning to migrate or who expect to spend part or all of the planned duration of any investment term overseas may be able to reduce their tax bill by using an offshore bond. This will happen either because they are able to take advantage of more favourable tax treatment in their new jurisdiction or because of the tax treatment of offshore bonds for those clients who are non-uk resident (not necessarily non-uk domiciled) during the term. Taxation position on offshore bonds One of the main benefits of investing in an offshore bond is gross roll-up, meaning that any underlying investment gains are not subject to tax at source. Income withdrawal strategies The client can withdraw up to 5% of the amount paid into the bond each year without paying any immediate tax on the withdrawal. This annual allowance is cumulative and so any unused part of this 5% withdrawal limit can be carried forward to future years. Trustee investors may also wish to consider income withdrawal strategies, potentially in conjunction with Discounted Gift Trusts (DGT). Matching investment return requirements The PruFund EGR approach can help advisers and clients to better understand their potential investment returns and hence enhance investment planning and targeting. Matching client attitude to risk and loss of capital The FSA s recent 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. The equity exposure parameters of the Risk Managed PruFunds can be used to tie-in with adviser s risk profiling output, while the multi asset and smoothing approach may meet cautious client needs. Defaqto Limited 11

12 Trustee investor opportunities There may be planning opportunities for advisers to engage with trustee investors as bonds are not deemed to be an income producing asset, hence negating the need for individuals or trustees to complete self-assessment tax returns. This option may present ease of administration for trustees and the flexibility of managing trust investments within a single wrapper. From a tax planning perspective there may be an opportunity to assign individual policy segments to beneficiaries and for trustees to avoid the highest rate of marginal tax on chargeable events. This may also appeal to married couples. Accessing guarantees Those individual and trustee investor clients seeking to guard against capital loss and further protect their unit linked bond portfolio from market falls can consider engaging with the range of PruFund guarantees. Mitigating investment market volatility The multi asset approach adopted by Prudential s PMG and the smoothing processes can also contribute to de-risking client investment portfolios. Reducing the impact of withdrawals in falling markets The smoothing processes and risk framework employed within PruFunds may also help advisers to reduce the threat of client s experiencing negative pound cost averaging within unit linked bonds, i.e. the negative impact of taking income withdrawals when funds have fallen due to market volatility, hence crystallising any investment losses. Corporate investor opportunities There may be an opportunity to approach corporate investors with surplus cash on their balance sheets about potential investment within a unit linked bond structure as an alternative planning option. The PruFund proposition may appeal to this type of investor where a more cautious attitude to risk and an adversity to capital loss are often present. Comparing PruFunds In terms of making high level comparisons with other funds the starting point for advisers may be the sector classification of each PruFund. The PruFund range comprises life and pension funds which are classified by the Association of British Insurers (ABI). The PruFund Cautious, PruFund Protected Cautious, PruFund Growth, PruFund Protected Growth and the four Risk Managed PruFunds each fall within the ABI s Unclassified sector. Due to the wide variety of different fund types present within the Unclassified sector Defaqto would in this instance suggest that advisers seek to make comparisons with other pertinent sectors. Based on the equity content of each of the PruFunds they can logically be compared to the relevant ABI Mixed Investment sectors. For example the Risk Managed PruFund 0-30 Fund can logically be compared with performance in the ABI Mixed Investment 0%-35% Shares sector. While PruFunds may be compared with other individual funds in relevant sectors it is important for advisers to consider some of the wider attributes of the PruFund proposition when seeking to make comparisons. This may include comparisons with other multi asset funds and other forms of outsourced investment solution. Defaqto Limited 12

13 2.7 How have the PruFunds been performing? Advisers may wish to appraise funds under consideration by analysing past performance and 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 done though 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 launch and over the past three years for the PruFund Cautious Fund and since launch and over the past three and five years for the PruFund Growth Fund. The performance of the FTSE 100 over the relevant time periods is also tracked for reference purposes. Performance comparison graphs for the Risk Managed PruFunds are included within Appendix A. The PruFund EGRs quoted by Prudential provide a further yardstick by which advisers can judge performance of the funds against their objectives. PruFund Cautious Fund (life fund) three year performance Chart 1 provides a comparison of the PruFund Cautious Fund s performance against that of a relevant ABI fund sector, the Mixed Investment 0%-35% Shares sector, over the past three years. The performance of the FTSE 100 over this time period is also tracked for reference purposes. Chart 1 PruFund Cautious Fund, three year performance analysis Defaqto Limited 13

14 PruFund Cautious Fund (life fund) performance since launch Chart 2 provides a comparison of the PruFund Cautious Fund s performance against that of a relevant ABI fund sector, the Mixed Investment 0%-35% Shares sector, since the launch of the fund in August The performance of the FTSE 100 over this time period is also tracked for reference purposes. Chart 2 PruFund Cautious Fund, performance since launch analysis Defaqto Limited 14

15 PruFund Growth Fund (life fund) three year performance Chart 3 provides a comparison of the PruFund Growth Fund s performance against that of a relevant ABI fund sector, the Mixed Investment 20%-60% Shares sector, over the past three years. The performance of the FTSE 100 over this time period is also tracked for reference purposes. Chart 3 PruFund Growth Fund, three year performance analysis Defaqto Limited 15

16 PruFund Growth Fund (life fund) five year performance Chart 4 provides a comparison of the PruFund Growth Fund s performance against that of a relevant ABI fund sector, the Mixed Investment 20%-60% Shares sector, over the past five years. The performance of the FTSE 100 over this time period is also tracked for reference purposes. Chart 4 PruFund Growth Fund, five year performance analysis Defaqto Limited 16

17 PruFund Growth Fund (life fund) performance since launch Chart 5 provides a comparison of the PruFund Growth Fund s performance against that of a relevant ABI fund sector, the Mixed Investment 20%-60% Shares sector, since the launch of the fund in November The performance of the FTSE 100 over this time period is also tracked for reference purposes. Chart 5 PruFund Growth Fund, performance since launch analysis Defaqto Limited 17

18 2.8 Are guarantees available on PruFunds? The PruFund Protected Cautious and Protected Growth Funds offer a range of guarantee terms (guarantees are not available on the Risk Managed PruFunds), for which there is an additional charge. The investment aims and high level asset allocations for these funds mirror those of the PruFund Cautious and Growth Funds. Asset Allocation PruFund Cautious Fund PruFund Protected Cautious Fund PruFund Growth Fund PruFund Protected Growth Fund Cash 8.1% 3.6% Fixed Interest 61.3% 40.8% Property 5.9% 12.5% Overseas Equity 9.2% 16.1% UK Equity 10.7% 17.8% Other Investment Assets 4.8% 9.2% Table 9 High level asset allocation of PruFund Cautious and PruFund Growth Funds (as at 30 th September 2013) Guarantee terms and charges Guarantees will only apply at the end of the client s selected guarantee term (the Guarantee Date) and each guarantee term has its own charge which will be payable for the whole of the guarantee term. These are annual charges and are levied as a percentage of the client s fund value. PruFund Name Product Type Guarantee Term and Annual Charges 8 years 9 years 10 years PruFund Protected Cautious Fund Onshore Bond 0.60% 0.45% 0.35% PruFund Protected Growth Fund Onshore Bond Not offered Not offered 0.50% PruFund Protected Cautious (Sterling) Fund Offshore Bond 0.60% 0.45% 0.35% PruFund Protected Growth (Sterling) Fund Offshore Bond Not offered Not offered 0.50% Table 10 Guarantee term and charges for PruFund Cautious and PruFund Growth Funds The guarantee protects a Guaranteed Minimum Fund (GMF) on the Guarantee Date while the client remains invested in the fund. At the client s Guarantee Date the value of their investment in the Protected PruFund will be reviewed against the guaranteed value. Defaqto Limited 18

19 If, at the Guarantee Date, the value of the client s investment is below the guaranteed value Prudential will increase the value of the fund to the guaranteed value. If, at the Guarantee Date, the value of the client s investment is higher than the guaranteed value the guarantee will not apply. The Guarantee Account within Prudential s With-Profits Fund pays the cost of the Holding Account guarantee and receives the charge for this guarantee. 2.9 Within which unit linked bond wrappers can PruFunds be used? It is important for advisers to identify which unit linked bond wrappers can be used in conjunction with the fund or investment solution under consideration. The PruFunds covered within this guide can be accessed through the following Prudential unit linked bond products, onshore and offshore (the areas in which these products can be researched through Defaqto s online tools are confirmed in brackets): Prudential Investment Plan (Unit Linked Bond) Prudential International Investment Bond(Pooled Fund Bond) Please note that the Risk Managed PruFunds are not available within the International Investment Bond. Adviser charging terms for Prudential Investment Plan In light of the commission ban imposed by the Retail Distribution Review with effect from 31 st December 2012 it is important for advisers to understand the adviser charging terms made available by each product provider. Set up charges for single premiums can be paid as a percentage of the single premium or as a specified monetary amount. Set up charges for regular premiums can be paid as a percentage of each gross regular premium paid. Ongoing charges can be paid as a percentage of fund or a specified monetary amount on a monthly or yearly basis. Ad hoc charges can be paid as a percentage of fund or a specified monetary amount What charges are levied on PruFunds and the unit linked bond? It is important for advisers to appraise the charges levied on the fund or investment solution under consideration and to gauge potential impact on returns for the client. Where this is to be used in conjunction with a product wrapper the associated product charging structure should also be appraised. Assuming that a PruFund is used within Prudential s Investment Plan on a nil adviser fee basis the charging structure would be as follows (PruFund charges may vary when used within other Prudential product wrappers): No product AMC Fund AMC of 1.35% (additional annual charges levied if guarantee is selected) A fund value rebate may be applied to the client s plan in the form of a percentage reduction in the AMC, ranging from 0.05% to 0.225%, which will be applicable when the client s fund value reaches 25,000. The rebate increases in line with the increased value of the client s fund. Adviser discounts may also apply. Allocation rate of 100% No fund switching charge (switching terms and conditions are applicable to PruFunds) No exit fee Defaqto Limited 19

20 Appendix A Risk Managed PruFund Performance Analysis PruFund 0-30 Fund performance since launch Chart 6 provides a comparison of the PruFund 0-30 Fund s performance against that of a relevant ABI fund sector, the Mixed Investment 0%-35% Shares sector, since its launch in November The performance of the FTSE 100 over this time period is also tracked for reference purposes. Chart 6 PruFund 0-30 Fund, performance since launch analysis Defaqto Limited 20

21 PruFund Fund performance since launch Chart 7 provides a comparison of the PruFund Fund s performance against that of a relevant ABI fund sector, the Mixed Investment 20%-60% Shares sector, since its launch in November The performance of the FTSE 100 over this time period is also tracked for reference purposes. Chart 7 PruFund Fund, performance since launch analysis Defaqto Limited 21

22 PruFund Fund performance since launch Chart 8 provides a comparison of the PruFund Fund s performance against that of a relevant ABI fund sector, the Mixed Investment 20%-60% Shares sector, since its launch in November The performance of the FTSE 100 over this time period is also tracked for reference purposes. Chart 8 PruFund Fund, performance since launch analysis Defaqto Limited 22

23 PruFund Fund performance since launch Chart 9 provides a comparison of the PruFund Fund s performance against that of a relevant ABI fund sector, the Mixed Investment 40%-85% Shares sector, since its launch in November The performance of the FTSE 100 over this time period is also tracked for reference purposes. Chart 9 PruFund Fund, performance since launch analysis Defaqto Limited 23

24 Appendix B 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-for-like 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 (for example, 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, Sterling & 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 (for example, 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 60% equity exposure (including convertibles) Minimum 20% equity exposure Minimum 30% fixed income and cash Minimum 60% investment in established market currencies (US Dollar, Sterling & Euro) of which 30% must be Sterling Sterling requirement includes assets hedged back to Sterling 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, Sterling & 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 Defaqto Limited 24

25 About Defaqto We are an independent financial research and software company specialising in rating, comparing and analysing financial products and funds. Since 1994, we have built the largest, whole of market, financial product database and become one of the leading providers of retail financial products and funds data in the UK. We now cover 17,500 products across banking, general insurance, life and protection, and pensions and investments across nearly 160 product types. We also hold data on 60,000 share classes across more than 15,000 funds including Investment Trusts, Insured Funds, ETFs and Offshore Funds integrating Morningstar data with our own, and cover more than 40 platforms across 30 providers. Our experts validate and analyse the data to provide insight and consultancy to all layers of the financial services sector including financial advisers, mortgage and general insurance brokers, product providers, web aggregators and the public sector. This data also underpins our product ratings, provider and intermediary product research tools and web services. If you have any feedback, comments or suggestions on how we can improve our publications, Defaqto Engage Defaqto Engage is the leading financial product, fund and platform research analysis system available to financial advisers. Defaqto Engage can sift through thousands of options and produce results in a matter of minutes and even keep track of how it did it, so users get a full audit trail to satisfy compliance. The reporting, analysis, recommendation and review process saves users time and effort. Defaqto Engage is completely web-based, offering the flexibility to search for products whenever and wherever necessary. It integrates with the advice process to ensure advisers deliver nothing less than best practice. For more information, or to arrange a 14 day free trial, visit Defaqto Consultancy Thorough research of products, funds and investments suitable to clients can be time consuming, shifting the adviser s focus away from the essential services they offer. Our consultancy services can support advisers to maximise the time spent with their clients. Defaqto s experienced consultants can undertake research and data analysis, saving time and money. From researching new products and markets to finding the perfect product/fund solution, we can provide all the professional support financial advisers may require, allowing them to focus their efforts on growing their business. For more information visit For further information please contact us on Defaqto Limited 25