Financial Planning FAQ

What role do the Insurance companies play and why recommend their use above direct mutual fund placement?
What are the most common types of underlying investment funds offered by the Insurance companies?
When should I sell a fund?
Once an investment plan is open, how much does it cost to buy and sell funds?
What happens if I die during the term of a regular premium savings plan?

What role do the Insurance companies play and why recommend their use above direct mutual fund placement?

The Insurance companies act as the administrator and the custodian of your investment. All money invested, whether by monthly or annual contribution or lump sum payment is made directly to the Insurance institution. The security of the investment and the custodians own financial strength is of paramount importance and all of the investment product providor’s we deal with are based in the financially stable and investor protected financial centres of the British Channel Islands of Guernsey and the Isle of Man. Even the most diverse and complicated portfolios can be administered and reported on through one source and the purchasing power of an Institution, as opposed to an individual investor, means discounted entry into the markets and at levels well below the usual minimum required by fund managers.

What are the most common types of underlying investment funds offered by the Insurance companies?

(1) Money market funds: These funds offer very low risk, balanced against low long term return. The underlying holdings will be a variety of short term debt instruments, including but not limited to government and treasury debt, wholesale money market and fixed interest securities offered by the private sector.

(2) Bond funds. These invest in longer term debt securities of both national governments and the corporate sector. Thus the short term risk is greater than the infinitesimal risk of the money market, but returns are usually higher. The underlying Net Asset Value of the fund may fluctuate due to both interest rate risk and default of payment. Unlike individual bonds, most bond funds do not mature; they trade to maintain their stated future maturity.

(3) Equity funds. These invest in common and/or preferred stocks or shares in publicly listed companies. Stocks usually have higher short term risk than bonds, but have historically produced the best long term returns. Equity funds often hold varying amounts of money market investments to meet redemptions; some hold larger amounts of money market investments when they cannot find any stock worth investing in or if they believe the market is about to head downward.

• Equity funds can be further sub divided dependant on their investment objective.
• Growth. These funds seek maximum growth of earnings and share price, with little regard for dividends. Usually tend to be volatile.
• Aggressive Growth. Similar to growth funds, but even more aggressive; tend to be the most volatile.
• Equity income. These funds are more conservative and seek maximum dividends.
• Small company. Most often of the growth or aggressive growth variety, since smaller companies usually don't pay much by way of dividends.
• International. Focus on global stocks generally investing in a wide basket of nations and companies.
• Country or regional funds. These funds buy stocks primarily in the designated country or region.
• Index funds. These funds have no active management, but Some index funds, particularly those emulating indices with large numbers of stocks such as the Russell 2000, emulate the index by buying a subset with similar industry mix, capitalization, price/earnings ratio, etc. Expenses are usually very low.
• Sector funds. These funds buy stocks only in one industry. Usually considered among the riskiest stock funds, though different sectors tend to have different levels and types of risk.
• “Ethical Investment" Funds. In addition to the usual investment goals, these funds restrict their investments to whatever they define as socially responsible. Such criteria can include: avoiding military, alcohol, tobacco, and gambling industries, preferring companies that treat their employees and the environment well. Different funds have different social and investment criteria.

(4) Balanced funds. By mixing stocks and bonds (and sometimes other types of assets) a balanced fund is likely to give a return between the return of stocks and bonds, usually at a lower risk than investing in either one alone, since different types of assets rise and fall at different times.

(6) Fund of Funds. These funds buy primarily other mutual funds. They choose other funds based on one or more of the investment goals outlined above. In these funds, a manager picks which other funds he or she believes are managed well. Sometimes these funds are market timing funds which prefer to leave the stock picking to other managers. These funds have expenses above and beyond those of the underlying funds.

(7) Life Company Managed Funds. These funds are in fact a “fund of funds”. A manager at the Life Company will be given the responsibility to balance or ‘weight’ the composition of the fund as he sees the present market climate. The manager of course can only choose from the Life Company range of funds and will be restricted in the maximum or minimum balance of pure stock market investment (equities) bonds or cash and also underlying currency risk

(8) Life Company Mirrored Funds. Investment into these funds is open to clients via products administered by the Life Company only and will follow closely the strategy, asset mix and style of the original fund manager with whom an agreement has been reached. However they are not the same fund. Fund performance will never match exactly that of the original fund mainly because of charges levied against the fund by the Insurance Company and slight differences in the investment process. The plus side is access to a widely regarded fund manager’s expertise through the Life Office as an institutional rather than individual investor.

When should I sell a fund?

It would be impossible to cover every circumstance that might warrant the sale of an investment, however there are some sound reasons for considering parting with a particular fund holding.

1. The fund's style has changed. If you have invested in a large-cap growth fund and the fund has begun investing in smaller, riskier investments it might be time to shed this fund. This can also operate conversely. If your fund's objective is to invest in emerging growth and becomes heavy with large and medium cap stocks, you might want to shift your money into a fund that more closely fits your investment objective.

2. The fund consistently lags behind. Poor performance in a single quarter or even a year does not necessarily constitute an automatic disposal of a fund, but if your fund has consistently lagged its peers, you may want to cut this one loose. Also, it's important to keep in mind that you have to make a fair comparison. Do not compare your utility fund against the S&P500. Compare it against similar funds with similar objectives. If you find that your fund has underperformed its peer group over 1, 3 and 5 years it's probably the right time to move on.

3. Management has changed hands. While this factor alone is not a true justification for moving your assets, it should send up a red flag for you to scrutinize performance more closely. Most funds have plenty of able managers ready to take the helm but you should be diligent in making sure that your new manager remains competitive with other fund managers in similar styled funds.

Once an investment plan is open, how much does it cost to buy and sell funds?

One of the major advantages of using a life company to act as the administrator of your portfolio of funds is the low or no cost dealing fees. In regular contribution savings plans there are normally free switch facilities up to a reasonable amount per year. A nominal cost of @15USD will be levied for switches thereafter. Portfolio management is slightly more expensive at an average of @25USD per deal, but again very competitive due to the institutional discount rates obtained by the Insurance company and passed back to the client.

What happens if I die during the term of a regular premium savings plan?

As the plan is issued as by a Life Insurance Company, the plan can be arranged at outset as either:

• Single Life. Based on the life of the sole Life Assured. At death the plan would stop and pay 101% of the bid value of the units held.
• Joint Life First Death. The first death of one of the two Lives Assured would trigger the automatic end of the plan and pay 101% of the bid value of the units held.
• Joint Life Second Death. The death of the last surviving of the two Lives Assured would bring the plan to a close as above.