Smoothed Fund Market Value and Unit Price Adjustments

Given the recent volatility in both stock markets and bond/gilt markets (lending to governments and big corporates) resulting in market falls and fund valuation losses, some providers are starting to make adjustments to their ‘smoothed fund’ prices resulting in investor fund values being adjusted down.

What is a Smoothed Fund?

Some investors do not like to see the value of their investments rise and fall every time the stock markets or bond markets rise and fall.  They prefer to invest in funds that prefer to smooth out the peaks and troughs of markets and give you stable, smoothed out rises and falls.  There are two types of smoothed fund namely a ‘With Profits’ fund and a ‘Smoothed Return’ fund.

What is a ‘With Profits’ Fund?

This type of fund invests mainly in stock markets but with a wide range of equities, gilts, bonds, property, and cash.  Each year, a bonus is added to your fund value.  Once added, this yearly bonus cannot be taken away meaning that the value of your fund does not fall in value.  In good times of market growth, you may only receive a yearly bonus of say 3% or 4%, even if the underlying assets in the fund have grown by say 15% and then in poorer times when markets fall, you still receive a bonus of say 3% or 4% even if the underlying assets in the fund have fallen by say 8% that year.  In good times, the excess profits/growth are kept in reserve to still offer you a bonus in the next the year even if markets have fallen.  Market volatility is being smoothed out.  Any reserve ‘profits’ in the fund are held back to get you through the difficult times and are usually displayed as a ‘terminal bonus’ or ‘final bonus’ that can rise, fall or even be withdrawn if markets fall and there are no reserves left.  At the end of the policy or when you cash in or transfer, you receive your investment plus yearly bonuses plus your share of any excess growth (the reserves) as a terminal bonus to represent the growth of assets in the fund that have been held in reserve for you.

With Profits Funds Market Value Adjustment (MVA): 

• If you have received more bonuses over the years than the actual value/growth of the underlying assets in the fund, you may face an adjustment down in value if you cash in at a point where your bonuses exceed real growth.  These are only applied if you cash in or leave the fund.  They are usually removed when the fund returns to growth and the asset value is worth more than the bonuses added to your fund so far.

What is a ‘Smoothed Return’ Fund?

In the similar way to a with profits fund, a smoothed return fund will invest in range of equities, gilts, bonds, property, and cash.  Each month or more usually, each quarter the fund manager sets an average ‘unit price’ or share price for that fund based upon average growth received and expected growth for the future coming quarter or year.  This way, your units in your investment fund are revalued to include forecast growth/future unit price and at the end of the period, the unit price is then adjusted to reflect the value as at today.  This then smooths out the peaks and troughs of the last quarter and you do not see your fund rise and fall in value every few minutes, i.e., you get a smoother return. 

Smoothed Fund Unit Price Adjustment (UPA):

• In good times, the unit price of the fund will be adjusted upwards if there has been growth of the assets in the fund more than what was forecast at the end of the period.  In poor times, if underlying assets have fallen in value or are lower than forecast at the end of the period, the unit price will be adjusted down.  These are unit price adjustments (UPAs).  UPAs can be up or down and are also designed to smooth out the peaks and troughs of markets.

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