Our main observation relating to Friends Provident’s with-profits bonus announcement today is that the “Equity Backed Ratio” (the proportion of the fund that invests in shares and property) barely rose during the year.

The financial strength of the fund was such that heading into 2009 the fund had already heavily reduced equity exposure. At the end of 2008, the fund had an Equity Backed Ratio of just 16%. This meant that unlike some of the stronger with-profits funds, it didn’t need to continually sell equities as markets plummeted in January and February 2009.

Increasing the exposure gradually so that it finished the year with an Equity Backed Ratio of 26% meant that they could enjoy some of the rally, but compared with a gross return of 17.17% for Friends Provident’s Cautious Managed Fund*, the 9.3% return before tax (about 8.3% in a bond and endowment) is hardly impressive.

We also feel that by comparing the returns in their With Profits Bond with the Halifax Liquid Gold account they have failed to make a realistic comparison. With-profits Bonds are long term investments while the Halifax Liquid Gold is an instant access savings account. At least Aviva compared their 10 year With Profits Bond performance in their annual statement with an average savings account with a return of 13.8% over 10 years. The Halifax Liquid Gold index grew by around 8% according to Friends Provident’s release. Hopefully most people will work out that a savings account with a total return as bad as 8% over 10 years was very hard to find and that the Friends Provident With Profits Bond return of 17.4% over 10 years to February 2010 is a poor return too.

Friends Provident continue to stick with their claim that bailing out of equities was a tactical decision (see page 3). If it was all about tactical decisions, they could surely have positioned the fund like they positioned their cautious managed fund and doubled the return? A quick look at the guaranteed bonus rates on Appendix 2 and the exceptionally low bonus rates of 0.1% on other classes of policy also indicate the company has made strong guarantees that weigh heavily on the liability side of the balance sheet. A with-profits fund with significant liabilities has to be sure that the assets can match them and this is why volatile assets like shares and property get sold. In the long term these volatile assets are likely to deliver the best return and so their absence ought to be of concern to long term savers with a moderate (or speculative) attitude to risk.

In summary, growth prospects remain sorely restricted for with-profits policyholders. The good news for some is that they clearly have very valuable guarantees but that also means that it’s bad news for others in the fund who don’t have such guarantees and who are destined for poor returns in the future. Friends Provident with-profits policyholders should get their policies assessed by an IFA with an expertise in with-profits to see which camp they are in.