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Unit-linked bonds are helping to restore UK investors' faith in stock market

7th June 2006
By IB Staff Writer

The UK unit-linked bonds market is set to double over the next five years, from GBP1.6 billion in 2005 to just over GBP3 billion in 2010, according to Datamonitor research. Unit-linked bonds offer greater fund choice, transparency, and flexibility, essentially ticking all the boxes that with-profits did not, and all without the high risk attributed to direct equity investments.

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The unit-linked bond market has driven the whole single premium bond market over the last year, making up 71% of total single premium life business. The year 2003 was a turning point for unit-linked offerings and by 2005 new business for this life bond outstripped with-profits by some GBP1.6 billion APE. Between 2001 and 2005, with-profits suffered a decline in the compound annual growth rate of 51%, while unit-linked experienced a positive compound annual growth rate of 32%.

The collapse of the with-profits market following the bear period of 2002 left a gap for a cautious investment vehicle that meets investors' need for transparency and fund choice.

Simple, flexible, transparent

On the back of the recent upsurge in the stock market and consumer confidence, unit-linked bonds have addressed investor demand for an increasingly simple, flexible and transparent product. Compare this to the more complex nature of tracking with-profits fund performance and it becomes obvious why unit-linked bonds are now the fund of choice.

The transparency of unit-linked products has allowed them to avoid the criticism leveled at with-profits. Without the mysterious market value adjustments penalties placed on early exit, revisionary and terminal bonuses applied to with-profits, consumers have a far greater understanding of the product and the risks involved.

Datamonitor forecasts unit-linked bonds to continue growing at a rapid pace between 2005 and 2010, far surpassing the growth of other investment bond products. Forecasts predict unit-linked new business to grow at a compound annual rate of 12%, which will see levels of new business in the unit-linked market grow from GBP1.6 billion in 2005, to just over GBP3 billion in 2010, with an increase share of single premium new business from 71% to 80% of the total life investment market.

Greater fund choice

Increased commoditization and provider focus on unit-linked products have resulted in substantial product innovations in the last two years. These have increased the attractiveness of the product and have opened up the possibility that it can compete on an equal footing with non-life investments, and movement towards a unit-linked product placed under an all-encompassing open architecture structure seems inevitable.

This open-architecture structure allows access to a range of provider funds via the purchase of one unit-linked bond product, and in some cases a multi-manager structure is also included, which allows access to funds on offer from a range of fund managers. The flexibility and fund choice inherent to these all-encompassing offerings is a particularly appealing feature and it is certain that no investor will be willing to accept a product that fails to offer these two mechanisms.

But providers need to focus on differentiation in the face of increasing commoditization. The move towards open architecture and multi-manager product offerings has given no real motivation for IFAs or investors to express preference for one provider over another. Development of portfolio planning tools, online functionality and a more simplified application process are key considerations for any product provider going forward.

Investor feedback

A focus on these issues will help to ameliorate the overall investment experience for both IFAs and investors, adding to the potential for future unit-linked growth. Furthermore, providers should focus on the possible benefits that can be accrued on the back of the Treating Customers Fairly initiative (TCF), brought into force by the Financial Services Authority some two years ago.

Far from being a hindrance, the TCF presents an opportunity to undertake consumer research, and a useful route into the acquisition of valuable investor feedback. Indeed, TCF is a prime opportunity for providers to understand how investors perceive their products, as well as achieving a greater understanding as to the demographic of those choosing to invest in a unit-linked offering.
'End Intelliext

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