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Investment Bond Portfolios

When assessing which investment bond provider to use it is essential to select an investment bond which offers access to a sufficient range of funds which can allow you to create and maintain your desired asset allocation. The investment bond providers differ widely in terms of the range of funds accessible. Some providers are fettered to their own funds and will not permit investment in any externally managed funds. Other providers offer “open architecture” which allows you to access a very wide range of externally managed funds including Exchange Traded funds, Open Ended Investment Companies (OEICs), investment trusts and insured funds. The institutional terms agreed by the investment bond providers can vary considerably, particularly with product such as investment trusts and unit trusts. With careful planning, investment bond portfolios can offer a wide range of diversification and the ability to spread risk.

For offshore investment bonds all of the providers require financial advice to be given. As a client you can limit the advice to only investment bonds, you can decline the advice or you accept some but not all of it. It is possible to buy individual shares in one company but you would need to appoint a Discretionary Fund Manager (DFM) who is acceptable to the offshore investment bond provider. The DFM has to give advice about which individual shares to invest in and they cannot accept an instruction from a client to deal on an “execution only” basis, that is to say to purchase shares without any advice. The reason for this is because you are not allowed to fall foul of the “Tailoring” rules which prohibit an investor from investing in individual shares without advice. There are some exceptions to this rule because some shares are permissible provided they are diversified. Two examples of this would be Exchange Traded funds and investment trusts, both of which are shares but both allow the bond investor to take them out without going through a Discretionary Fund Manager. This is because although they are both listed as shares, they are collective investment vehicles which are diversified enough not to require advice to be given by the DFM.

One approach used by bond investors is to devise their desired asset allocation first and then to see which investment bond providers can replicate the desired funds. Investment Portfolio construction can take many different forms with some investors favouring a “core/ satellite” approach with one or two core funds, often lower risk with higher risk satellite funds containing limited exposure to volatile sectors. Most clients prefer not to be restricted by an investment model and prefer instead to be able to change their asset allocation in light of their expectations of future market movements. Often they will invest in higher risk funds with a view to taking profits later and we can assist them with this with what we call “on-going monitoring and supervision” where we assess performance and make necessary changes to a portfolio by switching funds and making changes to the asset allocation. We also look for under-performance and if this is sustained we can recommend alternative funds.

Whilst investment portfolio construction is a subject which is beyond the scope of this blog, clients often try to diversify both geographically and across the “cap spectrum” gaining exposure to large, mid and smaller capitalised equities. Investing in assets which have little or no correlation can help reduce the overall volatility of a portfolio and we see clients investing in commercial property, corporate debt, government gilts, commodities, “thematic investments” such as healthcare funds and specialised funds which target specific geographical regions or countries, such as Russia or China. Some clients favour funds which show historically high yields in the form of dividends whilst others have a bias towards growth stocks with lower yields.

Often a bondholder’s portfolio will change over time, reflecting “profit taking” from markets thought to be overvalued and changing weightings within the portfolio as some sectors are added to or outperform and others are reduced through switching away or underperformance. Sometimes as clients become older they want to reduce risk and so prefer to invest more cautiously. Each case is different and an investment bond with wide enough investment powers is essential to meet changing investment requirements throughout the lifespan of the bond.

Some offshore investment bond providers offer a lower charging structure for a more restrictive range of funds. It is essential to consider whether the choice of funds is sufficient to allow the desired asset allocation to be replicated on an on-going basis. Many bondholders require a wide range of both passive funds, such as Exchange Traded Funds or trackers and actively managed funds such as investment trusts and unit trust/ oeics. We can assist you in finding the bond provider which offers a happy medium between cost and choice so that your investment portfolio can reflect your current and future asset allocation and preferences.


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