Steadying the course: The role of smoothed funds in navigating volatility

Many clients may feel anxious when confronted with market volatility, which can lead to hasty decisions about their investment portfolios. Indeed, since 2020, investors have faced a potent mix of inflation spikes, interest rate shocks, geopolitical uncertainty and several periods of poor equity market performance. Bond market losses have also challenged the idea of ‘safer’ assets.

In this environment, it’s no surprise that advisers and clients are looking for investments designed to steady the journey. This is where smoothed funds can make a difference, providing a unique approach to achieving steadier returns across varying market conditions.

Unlike traditional funds such as OEICs or ETFs, whose unit prices reflect immediate market movements, smoothed funds employ a smoothing mechanism to moderate the impact of short-term volatility. Rather than passing all market gains directly through to the fund’s price, a proportion of positive returns is reserved during periods of strong performance. These reserves can then be utilised to cushion the fund’s value during market downturns, ensuring that price movements remain measured and less reactive to daily fluctuations.

This approach results in a more consistent return profile, which can be particularly beneficial for clients seeking stability and a more predictable investment journey across varying market conditions. This smoother investment journey not only offers greater peace of mind, but also helps minimise the likelihood of clients making impulsive decisions at inopportune moments.

The concept of trying to protect investors from the full impact of market volatility dates back more than two centuries to the earliest with-profits funds of the nineteenth century.

Introduced in the early 2000s, smoothed funds offered a clearer, more straightforward alternative to the with profits products that had fallen out of favour due to opaque structures, discretionary smoothing and costly guarantees exposed by market downturns. By using a systematic, rules based method to moderate volatility and separating smoothing from legacy guarantees, they made it far easier for advisers and clients to understand how returns are generated and managed.

There has been a shift away from self built investments towards governed, outcome oriented solutions. Clients increasingly value simplicity, clarity and the reassurance of a professionally managed multi asset approach.

Smoothed funds align well with these expectations: they offer a single, governed portfolio with built in smoothing and a long term investment perspective, without requiring clients or their advisers to navigate asset allocation decisions themselves. Although operationally complex behind the scenes, the customer facing experience is streamlined and intuitive.

The UK’s investor base is ageing and this is reshaping demand. As the number of clients in, or approaching, the drawdown stage continues to grow, so does the need for investment strategies that can support more predictable income outcomes and capital preservation rather than maximum growth. People at this stage in life are also likely to have concerns about sequencing risk – or experiencing poor returns just before or after retirement. Smoothed funds prioritise stability and sustainability, help manager downside risk at critical life stages and support decumulation as well as accumulation – making them attractive as a consolidation option for later life savings.

Historically, access constraints limited how easily advisers could integrate smoothed funds within wider portfolio construction. That barrier is now beginning to fall as they become more widely available on adviser platforms.

The Scottish Widows Platform is the first platform outside of M&G to provide access to PruFund, M&G’s flagship smoothed managed fund offering.

With AUM totalling £70 billion and a 21-year track record, PruFund stands as the largest smoothed managed fund solution available to advisers in the market. Its combination of scale, structure and smoothing is designed to help manage short term market movements and offer a steadier investment experience. Its availability on the SW Platform now enables advisers to seamlessly incorporate the funds alongside existing models, wrappers and reporting processes, as part of a modern investment and retirement toolkit – ultimately to help deliver great client outcomes.