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Additional charges for investment-linked insurance gradually erode fund returns
With the global pandemic of the novel coronavirus disease (Covid-19), the situation in Italy, Spain, the UK and the US is now extremely serious, with confirmed cases rising rapidly. In the past March, the novel coronavirus triggered a global market crash, while US stocks experienced four trading halts. Given current market conditions and social-distancing measures, sales of investment-linked assurance schemes (commonly known as ILAS) have naturally been affected. However, just over two years ago, ILAS attracted many consumers by promoting funds with monthly distributions. With global conditions now unsettled, funds have naturally not been immune. The question is whether funds invested in through ILAS have performed considerably worse than those purchased through other platforms. Using the previously popular “Manulife Wealth Allianz Income and Growth Fund (Distributing)” (hereafter “Manulife Wealth Allianz”) as an example, this article explains how the “additional charges” of ILAS erode fund returns.
A considerable difference in fund net asset value when investing through ILAS
What does investing in funds through ILAS mean? Investors can invest in funds through different platforms, such as fund marketplaces and banks, while insurers’ ILAS products are another such platform. However, purchasing an investment-linked life insurance policy is different from investing in a fund: the former means that you are purchasing a life insurance policy, rather than its underlying assets (see Note 1). In addition, investing in funds through different platforms involves charges. It is worth noting that when investing in funds through an insurer’s ILAS, policyholders must pay “additional charges” to the insurer. Among the fund choices offered by ILAS products, some are mirror funds linked to another fund in the market. For example, the underlying fund of the previously popular “Manulife Wealth Allianz” is the “Allianz Income and Growth Fund (Distributing)” (hereafter “Allianz”). The chart below shows the movement in the net asset value (NAV) of the “Manulife Wealth Allianz” and “Allianz” funds over the period of more than three years from July 2016 to March 2020.
“Manulife Wealth Allianz” was established on 30 June 2016, so we selected 5 July 2016 as the starting point for comparison. The unit prices of “Manulife Wealth Allianz” and “Allianz” were not the same: the former was US$1 per unit, while the latter was US$8.82 per unit. To place the two funds on the same baseline, we normalised the price of the “Allianz” fund to US$1 (equivalent to 0.11 units).
The “Allianz” fund invests in corporate debt securities and equities in the US and/or Canada (see Note 2). From July 2016 to March 2020, North American stock markets experienced numerous rises and falls, which were reflected to some extent in the NAVs of “Allianz” and “Manulife Wealth Allianz”. The key point is that although the NAVs of the two funds moved closely together, rising and falling in tandem, the gap between them widened as time passed, and they gradually diverged. Taking the beginning of the observation period as the baseline, in July 2018, two years later, the NAV of “Manulife Wealth Allianz” was 4.8% lower than that of “Allianz”. A little over a year later, in March 2020, the NAV of “Manulife Wealth Allianz” was 6.8% lower than that of “Allianz”. This shows that when “Manulife Wealth Allianz” is purchased through ILAS, policyholders earn slightly less in a rising market and lose slightly more in a falling market.
[Revisiting an old article: The Hang Seng Index rises and ILAS sales surge — is it really just a coincidence?]
Additional charges collected by insurers: small percentages add up over time
Why do funds invested in through ILAS earn slightly less? ILAS have long been criticised for the high “additional charges” collected by insurers. Although ILAS products sold in recent years no longer charge substantial upfront fees, insurers still charge annual administration fees, management fees, policy maintenance fees and other charges amounting to a certain percentage. These “additional charges” may sound relatively low as a percentage, but over the long term they still erode the returns of ILAS funds. This is particularly the case in a low-interest-rate environment, where the impact of several percentage points each year should not be underestimated.
If you want to understand the “additional charges” of an ILAS product, you need to read its “Product Key Facts Statement”. You can search for the ILAS product under the “List of Investment Products” on the 《Securities and Futures Commission》 website and download the relevant sales documents. Taking “Manulife Wealth Allianz” as an example, the insurer charges an account maintenance fee and management fee of 1.7% to 3.3% every year of the net asset value (NAV) (see Note 3), which is reflected in the fund’s unit price.
[Further reading: How many charges are there for ILAS?]
Previously, many people purchased ILAS funds in pursuit of high yields. When discussing a fund’s performance, in addition to looking at its NAV, we must of course pay attention to its distributions. We once again compare investing in “Manulife Wealth Allianz” through ILAS with purchasing “Allianz” directly through the fund market. Assuming an investment of US$10,000 on 5 July 2016 and measuring up to 31 March 2020, both funds suffered a decline in value (with NAV below the investment amount). However, over the period of more than three years, investors received distributions (or dividends), which, when added to the NAV, were still slightly higher than the original investment amount. Based on net returns (change in NAV + total distributions), “Manulife Wealth Allianz” was still US$670 lower than “Allianz”, representing a difference of 42.5%. See the table below:
Recently, HSBC announced the cancellation of its 2019 final dividend and that it would not pay any further dividends before the end of the year, causing its share price to plunge temporarily. Income investing has always been a concern for many Hong Kong investors, showing that high-yield funds still have a market. The author has no intention of taking aim at fund purchases and sales or commenting on the merits of individual funds. The key point is that fund charges cannot be ignored. For ordinary investors seeking income, if they really switch to a fund with distributions, which platform offers more favourable charges? Have you examined the additional charges of ILAS carefully?
[Further reading: Short-term savings insurance — comparing guaranteed returns]
Notes:
- See 《MoneyHero: Comparison of investment-linked life insurance and funds》
- See the website of the Allianz Income and Growth Fund
- See the “Product Key Facts Statement” for “Manulife Wealth Allianz Income and Growth Fund (Distributing)”
This English version of this article has been generated by machine translation powered by AI. It is provided solely for reference purposes. In the event of any discrepancy or inconsistency between this translation and the original Chinese version, the Chinese version shall prevail.
10Life Editorial Team
Our team of professional content researchers focussing on insurance
10Life Editorial Team
Our team of professional content researchers focussing on insurance
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