Capital Guaranteed Insurance Euro Funds
Written by Dr Michael Annett, Anthony & Co International and Prof. Robert Anthony, Anthony & Cie
GGI Insider (#58), March 2012
The Euro Value fund has been around in France for a long time as part of life assurance contracts available to both individuals and corporate structures and, yes, believe it if you will, net performance rates at the turn of the new millennium were hovering around 7%.
The fund is a managed fund, and its composition and operation are strictly regulated making it unique.
Originally, the purpose of the fund was to offer a regular rate of return at rates that were higher than could normally be obtained from any other highly secure investment. This was achieved by the original funds being invested at around 70% in government and corporate bonds, with some 10% in life funds, 10% in property, 5% in loans, and some 5% in cash, so offering the possibility of making profits by trading. The functioning of the fund was simple – the assurer managed the fund and, once a year, declared a rate of return to represent both income and the capital growth attained. As the returns of the bonds were quite high at the time, it was not unheard of for the assurers to be frequently making handsome returns, and then preferring not to distribute all of their benefits so as to have the wherewithal to boost the returns of years when their returns had been less attractive.
In more recent years, and as the older bonds have been gradually maturing, finding new replacement ones with comparable returns has been increasingly difficult. This has led most assurers to issue new versions of these funds with a greater share-based investment so as to facilitate tapping into the eventual market growth, and more easily make profits on buying and selling stocks. Indeed, some assurers have even brought out versions of these funds that mainly invest not in bonds, but in property, all in the aim of boosting the ailing returns of these last few years whilst at the same time ensuring capital growth and security. But the government and corporate bonds of today are still generally high quality triple or double-A rated, sometimes accounting for as much as 85% of the bond holding, and with over 40% of the holding having maturity dates of more than 10 years, and some 35% with maturity dates of between 6-10 years.
Whilst recent rates of return might seem to be low, they can in fact, in time, reveal a totally different picture, as the great benefit of time is compounding – the interest-on-the-interest-on-the-interest-factor. As an example, take an annual flat rate return of 4% net, paid over 10 years: when looking at the overall growth of the fund at the 10-year point, the average rate of return would in fact be 4.80% per annum. Whilst this might not seem to be immensely different from the annual rate itself, carrying the process through to 12 years would increase this annual average rate to 5.01%, and to 5.34% at 15 years. Accordingly, as one can see, the effect of what might initially appear to be an average rate can, quite quickly, take on a completely different perspective – and produce higher real rates of return.
But the principle returns of the fund are not all that is good about the fund as, additionally, the returns, once paid, cannot be removed or lost. And the capital is safe – it is not liable to value fluctuations as the stock market values themselves fluctuate. In this sense, it is much like a deposit account, accumulating the annual returns each year and just growing.
Another important aspect of the fund is that it does have valuable guarantees. These are based around the minimum returns that the fund can pay – a guarantee that, in France, has never been invoked. There are basically two methods that can be used by the assurer to fix the minimum guaranteed return rate, most assurers using a link to the French average lending rate. In addition, there are limits on the extent to which this guarantee can change from one year to the next, and all whilst nonetheless ensuring it changes in line with inflation (up or down), all so as to create a truly realistic minimum rate of return.
However, in addition to choosing the right fund, as any one assurer has only one of these Euros Funds, additionally choosing the right assurance provider – and the right contract – are other factors to consider. As financial investment consultants, and independent brokers with over 30 years’ experience in France, Anthony & Cie are best placed to help you find your right combination, and help your wealth grow tax efficiently.
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