Keeping track of your investment
With-profits stakeholder funds performance information to 31 December 2007
If you're invested in one of our with-profits funds - shown on your statement as either 'WP Cautious Fund' or 'WP Growth Fund' - then please read this information carefully.
What is smoothing?
Smoothing of unit prices is the key to the way our with-profits funds work. Your fund invests in shares (also known as equities) and fixed interest investments. Together these are known as the underlying investments. The value of these underlying investments changes every day — sometimes going up and sometimes going down. Which means that, in normal circumstances, the value of your investment would also rise and fall. But here’s how your with-profits fund helps cushion you from the worst of these swings.
When the value of the underlying investments rises more quickly than we expect, we keep some money back. We then use this to top up the value of the underlying investments when they fall (or rise less quickly than we expect). And that, in a nutshell, is smoothing. Using it means that the change in value of your fund won’t be as dramatic as that of the underlying investments.
How does smoothing work?
We set an estimated growth rate (EGR) — which is an estimate of how well we expect the underlying investments of the fund to grow over the long term. The EGR isn’t guaranteed and may change in the future, and we only use it to calculate smoothing of unit prices. We show this rate as a yearly percentage but we divide it to give us a daily rate, which we then use to calculate the smoothed unit price.
Each day we compare the return earned on the underlying investments with the daily EGR. Then we calculate the daily smoothed growth rate, currently halfway between these two figures. And that’s how we get the next day’s smoothed price. The price of your fund can still rise and fall each day, but not as much as it would without smoothing.
People leaving the fund can also affect its price. Half of the profits or losses created in the fund by those leaving are added by the smoothing process into the next day's unit price.
Remember that although smoothing can provide a certain amount of protection, it can't cancel out the impact of a sustained fall in investment returns.
Companies writing with-profits business now have to publish their principles and practices of financial management (PPFM). Our PPFM helps current and potential with-profits investors understand how we manage our with-profits business. It also explains how this kind of business is governed. You can find our PPFM in the Useful downloads section on the right of this page.
