On 26/05/2020 Prudential announced Expected Growth Rate reductions on their smoothed funds and upward Unit Price Adjustments on some of their PruFund range smoothed funds.
Following these changes, I thought you would like more information and to keep it fairly straight forward I’ll focus on the key smoothed fund, PruFund Growth.
On PruFund Growth Prudential have announced an Expected Growth Rate reduction of 0.20% per annum down from 5.90% to 5.70% on pension, ISA and International Prudence Bond investments.
At the same time, while some of the other smoothed funds have benefited from an upwards Unit Price Adjustment (increase in fund value) PruFund Growth funds did not.
Why is this?
On the Expected Growth Rate (EGR)
- The EGR is an estimate of the expected investment return over the long-term, at least 15 years
- Prudential’s in-house stochastic asset model is used to generate a distribution of possible future investment returns (having regard to the current asset mix in each fund) over a 15 year period
- It is preferable not to make frequent changes due to the long-term perspective
As a business we (P and B IFA) have flagged up for a while now that we expect lower investment returns for longer. This is not a surprise as some of the key assets are producing far lower returns, cash interest rates and Government Bonds and other Fixed Interest assets.
To counter some of the lower returns Prudential have recently increased their equity content following a Strategic Asset Allocation review as noted in an earlier blog.
On the Unit Price Adjustment (UPA)
Why did the UPA not increase on PruFund Growth? Timing was a key point. The UPA down was applied to PruFund Growth on 17/03/2020. For a few days after this UPA markets continued to fall. Other ‘smoothed funds’ had their UPA a few days later, nearer the bottom for markets.
As a result, the PruFund Growth fund had further to grow back to hit the target to achieve an upwards UPA now. The ‘smoothing’ limit for PruFund Growth is 5%, PruFund Cautious (with lower long-term returns) has a ‘smoothing’ limit of 4%.
PruFund Growth as a fund is now in a good position to either benefit from further increases in asset values or a good position should markets fall again. Near the top of the ‘smoothing’ range without triggering a UPA.
- The smoothing process within PruFund is formulaic and non-discretionary
- All versions of PruFund are operating as expected given investment market conditions
- Where a particular version of PruFund has not yet had a positive UPA in 2020, the process should result in the fund being well positioned for any further recovery in markets
We have hit a bout of short-term volatility and although volatility has subsided a little now there is still plenty of risk in markets. However, as long-term investors we just need to be patient and remain invested. Markets will recover given time and so will your invested assets.
It’s also a good time to contribute to pensions and investments as asset prices are low now when compared to recent prices. Both lump sums and regular monthly contributions will benefit you over the medium to long term.
I’ve been reviewing PruFund Growth since Prudential launched it as an investment fund in 2004. It was interesting to see how this fund dealt with the Global Financial Crisis, stepped down in value and then stepped back up in value through a series of downwards and then upwards UPAs. The fund worked and smoothed out a lot of volatility.
It has also delivered good average investment returns over the long term for it’s risk profile, 5/10 ‘Low Medium Risk’.
PruFund Blog 26/05/2020: https://www.pandbifa.co.uk/prudential-prufund-growth-update/
Prudential Guide to Smoothing: https://www.pruadviser.co.uk/pdf/PRUF1098101.pdf