If you have money invested in France, you might cast your eye over French financial news every once in a while. If you did, you would see that funds known as “fonds en euros” are a hot topic at the moment and have been for some time. The reason is that since 1818, when the first “fonds en francs” (accessed via an assurance vie) became available, they became a must have in the way that “with profits” funds / endowments became popular in the UK. These funds are way behind the “with profits” curve, however, like them they are coming to the end of their use after many years of wide appeal.
The much doomed “with profits” funds, were often touted as guaranteed, even though they were not, as anyone who has heard the words “Market Value Reduction” will know. The fonds en euros on the other hand come with a very real guarantee. Unlike with profits funds, they have no ability to revalue if the markets start to look bad. The guarantee is generally underwritten by the provider, which is only good as long as they stay in business. Some place money into an escrow account supporting the fund Euro for Euro, so the fund stays protected even if the assurance vie provider fails.
Dwindling not Dead
The use of the fonds en euros is not dead, but is diminishing. Much of this is to do with cost, so not just diminishing returns. If a fund has higher costs than the return it is making, it is deemed to be “below water” and this is what is happening where bank, assurance vie providers and advisers are applying high charges to these funds.
In a world where interest rates are 0% in the EU and 0.10% in the UK, it is hard to get meaningful returns from anything with a guarantee. This means that cost matters a great deal and it is hard to spot the good ones because of how financial companies report; with many quoting the gross return, hiding the fact that the charges are above the gain, so please be mindful of this when comparing.
In conclusion, expensive companies and advisers are pushing people away from this fund and those with lower costs are still promoting it.
As long as they are in the black and have a good guarantee, these funds are still useful. The use, however, is not to make great investment returns, more to deal with income planning, since income should never be drawn from market based investments, potentially locking in “paper” losses. The point is that anyone holding all of their money that way is wasting their time anticipating any decent levels of return.
What About the Rest?
This is really what the French financial press cannot stop talking about, the fonds en euros were what everybody used, so what else do we do? They never seem to come up with an answer!
People in the UK and indeed most countries, do not have a fonds en euros, so use the basic financial tools, those being cash, bonds and shares with any UK adviser discussing only these (as I said, not many discussing with profits anymore).
Of course, there are many financial options, however, nearly all have become unviable. The UK Financial Times put it best when it coined (or arguably borrowed) the phrase TINA: There Is No Alternative … to the markets. Bonds are on their knees as are interest rates, derivatives are over priced as are annuities, so what else other than the markets? TINA it is!
Volatility and Permanent Loss of Capital
For many people, when they think of investing in the markets, they might also think of a roulette wheel and anxious, perspiring people standing around it, with their white knuckled fingers crossed for their choice of either black or red. For many investors, this is exactly what it is like, looking for the next Apple or Amazon and putting all their money in one or two companies; which is hardly sensible financial planning.
All it needs is for these not to work out and loss of capital is likely, if not certain. Of course, the pay off can be big too if it all works out. Sounds like gambling to me! The point is that most of the people that we talk to are not looking for a killing, just looking for sensible, reasonable returns, without the white knuckles.
If we consider the maths, the best way to avoid capital loss is clear. If you invest all your money in one company and it goes under, you lose everything. If you do the same but across 10 companies, one going under means a 10% loss; 100 companies, just 1%, a thousand companies, just 0.1%. If you got to 10,000 or even 20,000, you might consider that the world would be coming to an end to lose your money. This does not eliminate volatility, however, most people can cope with this, even if there is a low limit, which can be managed. What they cannot deal with is capital loss, which is mitigated by such a significant spread.
If we consider that very few actively managed funds even match the markets, let alone beat them, why pay them to try when there are far less expensive ways of accessing considerably diverse global strategies, which match / beat markets day in, day out? Clearly, there is more to an investment strategy than merely picking a tracker, as what do you track, how does it do the tracking? How does it fit with your investment objectives and timing / horizons? Is the level of volatility going to be acceptable to you?
These and many other questions need answering let alone the investment structures you will use and the tax implications, so the use of a suitable professional is always worthwhile.
This article was first published in the Connexion May 2021