Monthly archive for September, 2015
Last updated: 10/11/2015
Whilst the stock market remains as volatile as ever, there is one type of investment plan that continues to be a popular choice with our investors. Kick out plans offer a defined return for a defined level of risk, which combined with the opportunity to mature early seems to make them particularly sought after in the current climate. Whilst many investors find it harder to commit when markets are seemingly more unpredictable than normal, we have seen a recent increase in the number of new investments into this type of plan and since they are available as a capital protected deposit or a capital at risk investment, have become popular with both savers and investors. With this in mind, we give you our Top 10 reasons to consider a kick out plan.
Defined return, defined risk
With kick out plans the potential returns on offer as well as what needs to happen to provide these returns is known up front, before you commit your capital – a defined return for a defined level of risk. The investor therefore has the benefit of knowing at the outset the conditions that need to be met in order to provide the stated returns. This can be used to make an informed decision about whether to invest or not.
These plans have a maximum fixed term or normally six years, but the term ‘kick out’ refers to their ability to mature early depending on the movement of the underlying investment, such as the FTSE 100 Index. Plans that have the ability to mature early thereby providing an attractive level of growth along with a full return of your initial capital have proved popular with investors in all types of markets.
Potential for high returns
In addition to the opportunity for early maturity it is no doubt the potential for high growth returns that contribute to the ongoing popularity of kick out plans. With a number of plans offering the potential for double digit returns for each year invested (not compounded), the opportunity can be a compelling one, especially since what has to happen to the markets in order to provide these returns is known at outset.
Return on investment even if the market stays flat
A small number of plans offer returns only if the market goes up slightly but the majority offer the potential for a competitive growth return (up to 10.0%) even if the stock market stays the same. So if you’re not convinced the markets will rise in the future and yet still wish to achieve stock market level returns, this could be a compelling investment story and is perhaps why this type of investment has proved particularly popular while the FTSE still remains at what are historically high levels.
Click here to compare kick out investment plans »
Potential to beat the market
Should a kick out plan be designed to mature early provided the level of the FTSE 100 Index (or other underlying investment) at the end of each year is higher than its value at the start of the plan, then provided the Index has gone up, even if this is by a small amount, you will receive the headline return along with a full repayment of your initial capital. If the stock market had only risen by a very small amount then it is likely that this type of investment would have outperformed the market.
Investment level returns even if the market falls slightly
There are also kick out plans that will provide competitive growth returns even if the underlying investment falls slightly, for example up to 10% or 15%. These so called ‘defensive’ kick out plans thereby cater for a wider range of investor views as to what could happen to the stock market in the coming years. With current plans offering the potential for double digit returns, and whilst the FTSE has remained at historically high levels, this has proved to be a popular feature.
Click here to compare defensive kick out investment plans »
Some capital protection from a falling market
Your original capital is returned if the plan kicks out but should this not occur, typically your capital will be returned provided the underlying investment has not fallen below a certain amount, which is normally a percentage of its value at the start of the plan. To put this into context, for a plan which offers a return of capital unless the FTSE falls by more than 50%, then based on this morning’s opening value of 5,958.9, the Index would have to fall to a closing level of 2,979.5 before your capital would be at risk, a level not seen since 1995. However, if it does fall below 50% you could lose some or all of your initial capital. Please also remember that past performance is not a guide to future performance.
Fully capital protected options
Some kick out plans are also available with full capital protection, known as structured deposits. These therefore offer the potential for returns which are higher than those currently available from the more traditional fixed rate bond as well as Financial Services Compensation Scheme eligibility up to the prevailing deposit limits (currently £85,000 per individual per institution, reducing to £75,000 from 1st January 2016 onwards). However, it should be remembered that unlike fixed rate bonds the returns on these are not guaranteed.
Click here to compare capital protected kick out plans »
No annual management charges
Unlike investment funds, the charges for creating and managing kick out plans are already taken into account so there are no annual management charges which come out of the headline return. The costs associated with the management of funds happens each and every year (in both actively managed and tracker funds), which may help to explain the number of funds which fail to outperform the FTSE 100 Index or other benchmark, especially over a five or six year period. This ongoing cost is not a feature of kick out plans. Most kick out investments will though have an initial charge, normally up to a maximum of 3%.
Tax efficient – New ISA friendly
In addition to non-ISA investments, all of the kick out plans offered through Fair Investment Company are available to individuals as a New ISA up to the current limit of £15,240 (2015/16 tax year) and will also accept transfers from both Cash ISAs and Stocks & Shares ISAs. Please note that the tax treatment of ISAs depends on your individual circumstances and legislation which are subject to change in the future.
Understand counterparty risk
One of the main differences with structured investment plans when compared with other types of investments, such as funds or investment trusts, is that your capital is used to purchase securities and it is these securities which are designed to produce the stated returns on offer. These securities are normally issued by a bank which means that your investment is held with a single institution rather than split between a number of companies, as it would be within an investment fund. This means the risk of the bank becoming insolvent and therefore unable to repay your original investment along with any stated returns becomes a factor to consider – this is known as counterparty risk. Since the counterparty is usually a bank, the credit rating is normally available so a view can be taken on the potential risk involved. There are also plans which aim to reduce this counterparty risk by spreading it across a number of institutions.
Fair Investment view
Commenting on kick outs as a potential plan to consider, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “With markets continuing to make investors think very carefully before committing their capital, kick out plans have proved to be a popular choice by offering an often compelling balance of risk versus reward”.
He continued: “Although they should be considered fixed term plans, the opportunity to mature early, sometimes in as little as 12 months, is clearly an appealing feature for both savers and investors. Combined with the potential for high investment returns, even if the market stays relatively flat or in some cases even goes down, and it is understandable why this type of investment could be seen as an attractive opportunity in any investment climate, but especially when markets continue to trade at historically high levels.”
Kick out investment plans offer the potential for high returns balanced with conditional capital protection, with our latest selections offering a wide range of counterparties, collateralised versions as well as ‘defensive’ plans giving investors plenty of choice. We also have a number of kick out investments for our existing customers and those more experienced investors where you will find a range of dual Index plans which offer a higher risk versus reward, with current headline returns of up to 15% after 12 months.
Click here for the latest kick out investments »
Click here for the latest defensive kick out investments »
Click here for the latest kick out deposit plans »
Click here for our experienced investor section »
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
Tax treatment depends on your individual circumstances and may change. Make sure you check whether any charges apply prior to transferring any existing investment.
Although structured deposit plans are capital protected there is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.
Kick out investment plans are structured investment plans that are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to their future performance.
Having spent over 25 years at Invesco Perpetual looking after more than £30 billion of client assets, Neil Woodford is undoubtedly one of the UK’s best known fund managers. So when the announcement came around 2 years ago that he was intending to go it alone, it is perhaps understandable why this was one of the most eagerly awaited launches in UK fund management history. Now with more than 12 months trading history behind it, we take a look at how the fund has performed along with which shares have been the real star performers.
When Mr Woodford was talking about the impending fund launch he confirmed that the fund would have the same investment approach employed by him whilst in his former role at Invesco Perpetual, targeting capital growth and a level of income by focusing on valuations and seeking out companies that can return sustainable dividend growth, as well as those which will be the dividend payers of the future. His new fund would also include small-cap stocks and unquoted companies.
12 months on…
The CF Woodford Equity Income Fund launched on 2nd June 2014, and although his performance whilst at Invesco Perpetual had made him one of the most successful fund managers in recent times, as the investment maxim goes, past performance is not a guide to future performance. Whether he could mirror his previous achievements was of course at the forefront of every investor’s mind. So how has the fund performed?
Well, more than 12 months on, the widely followed fund manager has managed to accrue a portfolio worth close to £7 billion and with the performance to date that justifies investor’s confidence. In its first year, for the 12 months to the end of 30th June 2015, the fund returned 16.9%, compared with a 2.6% rise in the FTSE All Share Index, the fund’s investment benchmark. Not bad indeed.
As with all investment funds the full performance data is there for all to see and updated monthly, but what is extremely unusual for a fund manager is that not only has Mr Woodford made public all holdings in his fund (most funds groups only publish the largest 10) but he has also gone further and published details of the contribution of every single share held, thereby allowing investors to see how much each share has made, or lost, during the first full year of his new fund.
The star of the show in the year to 30th June 2015 was Allied Minds, a FTSE 250 company that provides finance and other services to early-stage technology companies originating from the United Sates. The company provided 3.2% of the fund’s 16.9% growth (equivalent to 19% of the total growth), driven by a 187% rise in its share price over the year.
The biggest growth of any of the companies invested in by Mr Woodford came from 4D Pharma, a pharmaceutical company focusing on the development and bringing to market of a number of projects targeting new therapeutic products and services. Woodford has long been a fan of the pharmaceutical sector and this is one that certainly paid off. Its shares rose by 515% in the year, contributing 1.58% of the fund’s overall performance.
Other top performers within the fund include Prothena, a biotechnology company based in the United States and Redde, a specialist insurance and support services group based in Bath, returning 154% and 144% respectively.
The biggest drag on performance came from Drax, the owner and operator of the large coal-fired power station in North Yorkshire. The holding accounted for 1.6% of the fund but reduced overall fund performance by 0.98% after its shares fell by 44% over the period.
The biggest share price fall came from Rightster, a company aiming to simplify the distribution of live and on-demand video by the use of a cloud-based software platform. Unfortunately shares in the business fell by 74% over the period, reducing the fund’s overall performance down by 0.45%.
New investments and exits
Further study of the Woodford Equity Income fund reveals that the portfolio has grown from 61 stocks at launch to 99 currently. There have been 52 additions to the fund in that time, whilst 14 companies have been given the axe including the only bank to feature at the launch of the fund, HSBC. Royal Mail was the biggest addition over the year and accounts for 2.3% of the fund while interestingly, twenty of the new additions are companies in the Health Care sector.
Fund size and allocation
Mr Woodford attracted £1.6bn of investors’ money when he launched the Woodford Equity Income fund, some of which came directly from funds he had previously managed at Invesco Perpetual. His now not-so-new fund has swollen to £6.94n as at the end of August 2015 with 86% allocated to businesses based in the UK and the three biggest sectors of Health Care, Financials and Consumer Goods contributing to 70% of the fund’s holdings.
The benchmark for the fund is the FTSE All Share Index and by comparison, the fund is significantly overweight in Health Care, 32.02% versus a sector benchmark of 8.57%, and Industrials, 15.23% versus 10.38%, the two combined totalling 47.25% compared to 18.95% for the benchmark. By contrast, the fund is significantly underweight in Financials, Consumer Services, Basic Materials and Oil & Gas, totalling 25.6% of the holdings versus a benchmark weighting of 55.4%.
The outperformance of the fund during its first year certainly suggests a proven and distinctive approach. The fund aims to only invest when there is a compelling long-term opportunity – and not to invest in shares just to make the fund look more like the index. As Mr Woodford’s style is often to go against consensus in order to deliver long-term returns, it will at times behave very differently to the overall market, a point which should ultimately be born in mind before investing.
The investment objective of the fund is to provide a reasonable level of income together with capital growth, which will be achieved by investing primarily in UK Listed companies. The fund is very much focused on delivering attractive long-term returns for investors through investment in quality companies that can deliver sustainable dividend growth. Income is paid quarterly.
Potential investors should therefore be looking to have their capital managed rather than simply having exposure to the market as a whole via an index fund or tracker. The team at Woodford Investment Management believes that “active fund management adds value for investors and that this is never more true than in challenging economic conditions”.
This fund is an actively managed fund which has outperformed its benchmark in its first year by some margin whilst Neil Woodford’s previous track record is testimony to his ability to make the right decisions when conditions are tricky – but ultimately past performance cannot be used as a guide to what will happen in the future and so you need to satisfy yourself first whether he can continue in the same vein over the longer term.
Invest via the Fair Investment Fund Supermarket
The CF Woodford Equity Income Fund is available for investment through the Fair Investment Fund Supermarket at 0% initial charge. The fund is available for this year’s ISA allowance (maximum of £15,240 for the 2015/16 tax year) and we also accept Cash ISA and Stocks & Shares ISA transfers. Investors who have already used their ISA allowance can invest via our investment account. If you’re ready to invest, then you apply online here.
Find out more and how to invest in Neil Woodord’s Equity Income Fund »
Research and invest in shares now via Barclays Stockbrokers Marketmaster »
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice. Tax treatment depends on your individual circumstances and may be subject to change in the future.
The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors. Past performance should not be taken as a guide to the future and there is no guarantee that these investments will make profits; losses may be made.
Potential 10% each year for up to 10 years
Depending on which of the two investment options is selected, this new launch from Mariana offers investors the potential for either 10.0% or 12.5% per year, both dependent on the performance of the FTSE 100 Index. In addition, the plan offers the ability to mature early or ‘kick out’ each year from the end of year three onwards and is the first plan of its kind to extend the maximum term to 10 years, hence the plan name. With the potential for such high headline returns from a plan based on the FTSE only, we take a closer look at how this new investment plan works in order to better understand the risk versus reward.
Fixed term investment plans that have the ability to mature early each year are commonly known as ‘kick out’ plans. These plans are popular with investors in all market conditions but seem to gain increased interest when the stock market is at historically high levels since they are often structured in a way that can produce investment level returns even if the market stays relatively flat – and this is exactly what the latest launch offers investors.
The 10:10 Twin Option FTSE Kick Out Plan offers the potential for double digit growth on your capital depending on the performance of the FTSE 100 Index. Investors have two options, the difference between them being the level the Index has to reach in order for the plan to make a growth payment along with a return of your original investment.
For those targeting the higher return of 12.5% each year (not compounded), the FTSE must end the year 10% or more higher than its value at the start of the investment whilst the required level of the Index reduces to the same or higher for the lower headline return of 10.0%. If the plan does not kick out at all, the return of your initial capital is also dependent on the FSE 100 Index with your capital put at risk if the Index at the end of the investment term is more than 30% lower than its value at the start of the plan, in which case your capital will be reduced by 1% for each 1% fall.
The potential for high returns
In addition to the opportunity for early maturity it is no doubt the potential for double digit returns that will add to this plan’s popularity, especially since despite its recent falls, the FTSE still remains at what are historically high levels. The return is not compounded, but will be paid to you for each year the investment has been in place, thereby offering compelling returns, and if the Index stays relatively flat or only rises by a small amount, offers the potential to beat the current stock market. If the plan does produce an investment return, your initial capital is also returned to you in full along with the growth payment.
The term ‘kick out’ refers to the ability of the investment plan to mature early depending on the movement of the FTSE 100 Index. The 10:10 Twin Option FTSE Kick Out Plan has the potential to mature at the end of each year from year three onwards, provided the value of the Index meet one of the required levels, depending on which option you invest in.
FTSE 100 Index
Plans linked to the FTSE 100 Index provide a potential return against what is widely recognised as the proxy benchmark for most investors and investment managers. Since the historical volatility is familiar to many investors, they are in a better position to consider the pros and cons of the plan within the context of the underlying investment. Plans which offer double digit returns are often linked to the performance of a small number of shares listed on the FTSE rather than the broader exposure to the UK stock market offered by the Index.
The required level the FTSE 100 Index has to meet in order to provide an investment return depends on which option is selected. Investment option two which offers the higher headline return of 12.5% growth each year (not compounded), requires the level of the Index to be at least 10% higher than its level at the start of the plan. Investment option one offers a potential 10.0% a year (not compounded) with the required level simply being the same or higher than its level at the start of the plan – this means the Index can remain flat and you would still receive double digit returns… Investors can also split their investment between the two options provided the total invested meets the minimum £5,000.
Investment term – breaking new ground…
The plan has broken new ground in that the maximum term is set at 10 years rather than the more common five or six years of most structured investment plans. This could be seen as an advantage over the shorter terms for those investors who would prefer to stay invested should we experience a market downturn in anticipation of markets recovering with the potential for a double digit return to compensate.
Although the plan can be encashed prior to the end of the term, the proceeds you receive will depend on a number of market factors and could mean that you may receive less than your initial investment. Since the investment is designed to be held for the full term it should only be considered by those who are able to invest their capital for ten years.
Some capital protection from a falling market
Should the plan provide a growth payment then this is made along with a full return of your initial investment. However, if the plan runs the full 10 years and fails to provide any growth, the return of your initial capital is conditional on the FTSE 100 Index not falling by more than 30% of its value at the start of the investment. This is known as conditional capital protection and with this plan is measured at the end of the investment term only. Provided the Index has not fallen below this level, you will receive a return of your initial capital but if it has, your initial investment will be reduced by 1% for every 1% fall in the FTSE, so you could lose some or all of your capital. In this situation you would lose at least 30% of your initial capital.
Back testing: how the plan would have performed historically
Back testing is statistical research which uses hypothetical products with identical terms to this investment plan and considers how they would have performed over a 15 year period had they been launched since August 1994, giving a total of 3,781 different hypothetical products. This analysis shows that for investment option one a kick out did not occur 4.49% of the time and that at least 30% of the initial investment was lost in 0.56% of occasions. For investment option two, a kick out did not occur in 13.94% of cases and at least 30% of the initial investment was lost in 2.88% of cases.
Please note that this analysis is simulated and has no bearing on how this plan will perform in the future, actual performance may produce significantly different results. It is not a reliable indicator of future performance and should not be used to assess the risks associated with the plan.
Societe Generale as counterparty
Unlike an investment fund, this plan uses your investment to purchase securities issued by Societe Generale and so their ability to be able to meet their financial obligations become an important consideration. This is known as counterparty risk (or credit risk) and means that in the event of Societe Generale going into liquidation, you could lose some or all of your initial investment as well as the payment of any growth return. In this event you would not be entitled, for this reason alone, to compensation from the Financial Services Compensation Scheme (the ‘FSCS’).
Credit ratings and agencies
One accepted method of determining the credit worthiness of a counterparty is to look at credit ratings issued and regularly reviewed by independent companies known as ratings agencies. Standard and Poor’s is a leading credit ratings agency and as at 25th August 2015, Societe Generale has been attributed an ‘A‘ rating with a negative outlook. The ‘A’ rating denotes a strong capacity to meet its financial commitments but could be more susceptible to adverse economic conditions than companies in higher-rated categories. The negative outlook indicates that the rating may be lowered in the short to medium term (between 6 months to 2 years).
Defined risk and defined returns
One of the features of this investment is that the potential returns are stated up front, prior to investing. This allows the investor to consider the potential upside in the context of the amount of risk they are taking since you know at the outset exactly what needs to happen in order to receive the returns as well as a return of your initial investment.
We expect this investment to be popular with both non-ISA and ISA investors. The plan is available as a New ISA up to the current limit of £15,240, and also accepts transfers from both Cash ISAs and Stocks & Shares ISAs. The minimum investment is £5,000 which can be split across the two investment options.
Fair Investment conclusion
Oliver Roylance-Smith, head of savings and investments at Fair Investment Company, commented on the plan: “The headline returns on offer from this plan are some of the highest currently available from a kick out investment linked to the performance of the FTSE 100 Index. With the FTSE recently closing below 6,000 for the first time since 2012, investors may see this as a good time to invest in a plan that offers high growth returns even if the market stays flat, whilst the extension to a 10 year maximum term may offer some reassurance to investors who consider a market downturn could affect the return on their investment.”
Past performance of the FSTE 100 Index is not a guide to its future performance.
The plan is open now for new ISA investments (maximum £15,240), ISA transfers and non-ISA investments.
Click here for more information about the Mariana 10:10 Twin Option FTSE Kick Out Plan »
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek professional advice. Tax treatment depends on your individual circumstances and may change. ISA transfer charges may apply, please check with provider.
This is a structured investment plan that is not capital protected and is not covered by the Financial Services Compensation Scheme (FSCS) for default alone. Returns are not guaranteed and there is a risk of losing some or all of your initial investment due to the performance of the FTSE 100 Index. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.
Investec Bank continues to offer innovative savings plans which combine a competitive interest rate with efficient service and attractive features. So if you have a minimum of £25,000 to deposit, and you want to take advantage of some of the highest savings rates on the market, their latest range of accounts are certainly worth reviewing.
All the Investec savings accounts featured below are covered by the Financial Services Compensation Scheme (FSCS). Please be aware that the FSCS limit for deposits are due to change after 31st December this year.
Investec Bank fixed rate bonds – up to 2.15% AER
For those who are able to tie their money up for a fixed period and are also looking for a fixed and regular rate of interest, Investec offers a trio of fixed term deposits with terms of one, two and three years.
As you would expect, the rate of interest increases with the term – the 1 Year Fixed Term Deposit has been the most popular with savers and pays 1.95% AER, while the 2 Year Fixed Term Deposit pays 2.05% AER. Higher returns are available for those who are prepared to lock their money away for 3 years, with Investec’s 3 Year Fixed Term Deposit offering 2.15% AER.
Interest on all three fixed rate bonds can be paid annually or monthly, they can be set up as a single or joint account and access to account information is online or via telephone. As with most fixed term accounts, no early withdrawals are permitted. You can apply quickly and easily online.
Click here for more information on the Investec 1 Year Fixed Term Deposit »
Click here for more information on the Investec 2 Year Fixed Term Deposit »
Click here for more information on the Investec 3 Year Fixed Term Deposit »
Investec 3 Year Base Rate Plus Account – minimum 2.35% AER
For those who want to take advantage of increases to the Bank of England Base Rate but still want the convenience and security of a minimum fixed return, Investec have shown some welcome innovation in the market with their 3 Year Base Rate Plus.
Perhaps the most popular of Investec’s current savings range, this account pays 0.5% AER/variable above the Bank of England Base Rate for 3 years but with a minimum rate of 2.35% AER, so whatever happens you know you will never earn less than this.
This account therefore offers you the chance to take advantage of any future Base Rate rises over the next three years whilst also offering the safety net of a minimum return. Interest is not compounded and will be paid into your nominated account annually. No early closure or withdrawals are permitted and you can apply easily online.
Click here for more information on the Investec 3 Year Base Rate Plus »
Investec 2 Year Double Base Bond
Finally, for those prepared to tie their money up for 2 years but who also consider an increase in the Bank of England base rate is likely, Investec have shown further innovation with their 2 Year Double Base Bond. This account pays double whatever the Bank of England Base Rates is during the 2 year fixed term, plus an additional 0.50% on top. This means currently you would receive 1.50% (variable).
If the Bank of England Base Rate increased by 0.25% the variable rate would increase to 2.0% and if the Base Rate rose by 0.5% then your variable rate would increase to 2.5%. Investec’s current 2 Year Fixed Term Deposit is offering 2.05% fixed. No early closure or withdrawals are permitted during the term of the plan and interest will be paid annually into your nominated account. Access to you account is via online and telephone banking and you can apply easily online.
Click here for more information on the Investec 2 Year Double Base Bond »
Investec Bank plc
Investec is an international, specialist bank and asset manager with its main operations in the UK and South Africa. The group was established in 1974 and as at April 2015, currently employ around 8,200 people and look after £124.1 billion of third party assets under management. They provide a range of financial products and services and specialise in a number of areas, particularly within the banking sector. Their UK banking operation, Investec Bank plc, looks after £10.3 billion of customer deposits. They are also a market leading provider of investment plans and structured deposits.
Click here to compare all Investec savings accounts »
Click here to compare all Investec structured deposits and investment plans »
No news, feature or comment should be seen as a personal recommendation to invest. If you are at all unsure of the suitability of this type of investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
AER stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.
Here at Fair Investment Company there are a large number of our investors who decide to invest through us again and again. Some of our reviews tell us that this has something to do with our excellent customer service and the quality and relevance of our wide range of savings and investment products. This is also why in late 2012, we launched our experienced investor section. Here we take another look at what is driving more and more new and existing investors to these innovative investment ideas as well as give you some of our current income and growth selections.
Existing investors – the inspiration
As a company, we have always looked at ways of providing innovative savings and investment ideas, which has often led to offering alternative opportunities alongside more traditional ways to save and invest. Initially inspired by a growing number of existing investors who were seeking new investment ideas, our experienced investor section is now in its third year and continues to enhance our overall offering by featuring a range of innovative investment products.
Fixed term investments
Many of our investors, both new and existing decide that an investment with a fixed term is the right way forward. This is why our most popular type of investment is the structured investment plan. These plans offer a defined return for a defined level of risk, thereby offering a more predetermined level of risk versus reward than the better known investment fund. The return on offer is usually dependent on the performance of the stock market with the majority of plans being linked to an investment index such as the FTSE 100 Index, or a small number of listed shares, normally well known FTSE 100 shares.
A wider range of investment selections
Designed to complement our broader range of savings and investment ideas, our experienced investor section is aimed at making it easier for you to find and compare the latest income and growth investment opportunities whilst also giving you plenty of investment ideas and product selections to help you identify whether they meet your needs.
This is where the experienced investor section offers additional investment opportunities, available to both new and existing customers. Listed here is our selection of plans whose performance will depend on a wider range of underlying investments, be this the FTSE 100 Index or indices from the US or Europe, a blend of more than one index or perhaps a specific number of stocks targeted at a benchmark or sector.
Who is an experienced investor?
As such the knowledge and experience required to review them as a potential investment opportunity is considered higher than for our other investment plans. Therefore these might not be appropriate for someone new to this type of product or new to investing but rather are designed for customers who have already invested in a similar product or who fully understand and have experience of putting their capital at risk.
Since Fair Investment does not give advice, we feel there are certain investments which should only be considered if this knowledge and experience can be established and although there are no formal set criteria, the following are examples of someone who might be considered an experienced investor:
1. An existing customer who has invested in a capital at risk product
2. A new customer who has, in the last 5 years, held a capital at risk investment
3. A new customer who has, in the last 5 years, held a structured product
Since an assessment of appropriateness forms part of our application process, all investors into any of the plans listed in this section will need to show that they have the necessary knowledge and experience by confirming they fit into one of the above or similar and we may need to obtain further details from you in order to confirm this.
With the potential for double digit growth returns and high income yields, this section is aimed at more experienced investors who are looking for a wider selection of top income and growth ideas and who are prepared to take a higher level of risk. Here we take a closer look at some of our current selections.
Potential for 8.8% p.a. income, quarterly payments
The Focus Dual Index Quarterly Contingent Income Plan offers up to 8.8% each year based on the performance of the FTSE 100 Index and the EURO STOXX 50 Index, the 50 leading blue chip companies in the Eurozone. A 2.2% payment is made at the end of each quarter provided both indices close at or above 80% of their values at the start of the plan. If one or both Indices are below 80%, no income will be paid for that quarter.
The plan also offers some capital protection against falling stock market since your initial investment is returned in full unless one or both indices falls by more than 40%, measured at the end of the fixed term only. If this does occur, your capital will be reduced by 1% for each 1% fall of the worst performing index, so you could lose some or all of your initial investment.
Fair Investment view: “If you are looking for a high level of income and do not think either the UK or Eurozone markets will fall by more than 20% over the medium term, this plan could be a timely opportunity, whilst the quarterly payment frequency is likely to appeal to most income seekers. The plan also has the opportunity to mature early each quarter from year onwards in which case investors will receive their original capital back along with a final income payment.” Click here for more information »
Potential 15% return after just 12 months
The Dual Index Kick Start Plan from Meteor is a fixed term investment that will mature early or ‘kick out’, depending on the performance of the FTSE 100 Index and the EURO STOXX 50 Index (made up of the 50 leading blue chip companies in the Eurozone). If the values of both indices at the end of each year are at or above their values at the start of the plan, investors will receive 15% at the end of year one, or 15% plus an additional 10% for each year thereafter.
If one or both Indices close below the required level each year, no growth return will be paid and your initial investment will be returned in full unless one or both Indices has fallen by more than 40% at the end of the plan. If it has, your initial capital would be reduced by 1% for each 1% fall of the worst performing Index, so you could lose some or all of your investment.
Fair Investment view: “Investors in search of the potential for high returns may find the opportunity for 14% growth after just 12 months along with a full return of capital, to be a compelling one. Depending on your view of the UK and European markets, an investment that offers the potential for such high growth returns even if the markets stay flat, could be worth a closer look.” Click here for more information »
Potential 11% annual returns
The Investec Dual Index Step Down Kick Out Plan offers 11.0% for each year invested (not compounded) provided the value of the FTSE 100 Index and the Euro STOXX 50 Index (made up of the 50 leading blue chip companies in the Eurozone) are at or above a specific level at the end of each year, compared to their values at the start of the plan. The required levels are 100% at the end of year two, reducing by 5% each year thereafter down to 80% in the final year.
If either or both Indices close at or below the required level each year, no growth return will be paid and your initial investment will be returned in full unless one or both Indices falls by more than 50% during the plan. If this occurs and one or both Indices are lower than 80% of their starting values at the end of the plan, your initial capital would be reduced by 1% for each 1% fall of the worst performing Index, so you could lose some or all of your investment.
Fair Investment view: “The potential for double digit returns even if the markets go down by up to 20% could be a compelling investment proposition in the current investment climate and this plan is proving popular with our existing investors. So depending on your view of the UK and European markets, this plan could offer a compelling combination of high growth potential, the ability to mature early along with some capital protection should markets fall.” Click here for more information »
Growing number of investment opportunities
As stock markets around the globe continue to provide a mixture of highs and lows, this section has grown more and more popular since launch and we continue to work hard to expand the depth and range of opportunities that are listed. We hope you find the experienced investor section helpful and easy to use – please do let us know what you think or if you have any questions: email us at [email protected] or call us on 0845 308 2525.
Keep visiting for the latest plans
Changes to stock market conditions bring with them new investment trends and opportunities. Structured investment plans can often be well placed to capture some of these opportunities and so there are a regular flow of new investment ideas on offer and we make regularly changes to the investment plans listed in the section. These plans are normally only available for between four to six weeks and since they can be very popular, some do close early because they have been oversubscribed. Therefore keep visiting in order to seek out the latest offers.
Visit the Experienced Investor section »
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
The plans detailed in this article are structured investment plans that are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of individual shares, the FTSE 100 Index and the EURO STOXX 50 Index is not a guide to their future performance.
Despite the prospect of interest rates rising in the next few years, many savers understand that even when this does eventually occur, there is no guarantee that this will result in higher savings rates being offered by the banks. Indeed, most of us would agree that the 5% plus returns of yester-year are well and truly behind us. This has led many to consider moving some of their savings into areas with the potential for higher returns. Investing is perhaps the most obvious choice however there is also a popular middle ground, which combines the potential upside of stock market linked returns but without risking your capital and maintaining the FSCS depositor protection so many savers look for – the structured deposit.
Since many of these savers are using money that historically would have been put into a fixed rate bond, so we take a deeper look at the rise in popularity of the structured deposit by comparing it with the more traditional fixed rate.
Fixed rates fail to hit the mark
We are all aware that past performance is no guide to future performance when it comes to reviewing a particular investment or how a stock market index has performed previously, but what are the main risks associated today with cash and savings rates?
In years past it would have been commonplace for savings accounts to offer the potential to beat what at the time would have been much higher levels of inflation, especially if you were prepared to tie yourself in for the medium to longer term. But today, the best fixed rates are offering little above 3% and this has been the case for some time. This is therefore a significant shift in the savings landscape.
Savings or investment?
This sets the scene for the rise in popularity of an alternative to fixed rates bonds – the structured deposit. This product similarly provides full capital protection and can also be used for ISA money, both New ISAs (NISAs) and ISA transfers, therefore placing it in the savings space as a potentially viable alternative to more traditional offerings.
There are a variety of structured deposits being offered in the market today. Although they can be considered as an alternative to fixed rate bonds, they also have characteristics that are similar to investments. The purpose of this comparison is to help you understand what structured deposits are by comparing them with the more traditional fixed rate products and what you should look out for before putting your hard earned money in such products.
What is a structured deposit?
A structured deposit is essentially a combination of a deposit and an investment product, where the return is dependent on the performance of an underlying investment. The underlying investment is normally either an Index, such as the FTSE 100 Index, or a smaller number of shares from within the Index.
UK structured deposits naturally lean towards the FTSE 100 Index as this is the most commonly quoted benchmark of investment performance and is the most familiar to investors in this country. If the deposit uses a smaller number of shares rather than the Index itself then these are normally shares listed within the FSTE 100 Index and often it is the larger shares available that are used.
How do structured deposits compare with fixed rate bonds?
Structured deposits have a few important characteristics that distinguish them from the more traditional savings accounts. With a fixed rate bond the returns and maturity periods are fixed while structured deposits on the other hand have variable returns, and in some cases, variable maturities as well.
Structured deposits generally provide the possibility of higher returns compared to fixed rate bonds. This has particularly been the case in recent years with continuing record low interest rates and historically low savings rates. However, you should balance this possibility of higher returns against the risk of variable returns. In some scenarios, you may get lower or no returns at all.
Fixed or variable maturities
Most structured deposits have fixed terms which are normally between three and six years in duration whilst some incorporate the ability for the deposit to be redeemed before the maturity date. A popular example of this is an autocall, more commonly known as a ‘kick out’ plan. Here, the plan will mature early or ‘kick out’ provided the underlying investment performs in a particular way, which will be known prior to investing since it will specified in the terms and conditions of the plan. The Investec Kick Out Deposit Plan for example will mature early if the value of the FTSE 100 Index at the end of years 3, 4 or 5 is higher (subject to averaging) than its value at the start of plan. If it is not higher on any of these dates, the plan will continue.
Where a structured deposit is designed in this way and early maturity does occur, you can expect to receive, as a minimum, the full value of your initial deposit. Depending on the circumstances, this early redemption feature may benefit you – for example, if you wish to use your money in other ways, you can get back your initial capital and any stated additional returns as soon as redemption occurs.
You may, however, be exposed to reinvestment risk, as you would with any fixed term savings product. This is the risk of having to re-invest your money in a low interest rate environment when interest rates fall. To counter this, structured deposits are usually re-issued every 4 to 6 weeks so there is normally the facility to reinvest either in the provider’s current version of your original plan, or if the exact plan is no longer available, a similar plan with your original provider or another in the market. Therefore, depending on market conditions and your specific income or growth needs, a structured deposit may or may not be a good investment to put your money in.
What happens if I need to withdraw my deposit before the maturity date?
Structured deposits, like fixed rate bonds, are meant to be held for the full term. Your initial deposit will be repaid in full only at maturity (or early maturity where relevant). If you withdraw your deposit before the maturity date, you may lose part of your return and/or your initial capital. The amount payable to you depends on the market value of the underlying investment that your structured deposit is linked to, which cannot be pre-determined. There is also therefore the possibility that the value could be higher than your original deposit. You should also bear in mind that structured deposits may be subject to periodic valuations which may not be on a daily basis, for example weekly. This means that you may not be able to withdraw your deposit immediately.
What should I consider before investing in a structured deposit?
Structured deposits come in different forms. You should consider whether a structured deposit fits with your financial goals, attitude to risk and your personal situation. When choosing a structured deposit, these are some of the factors to consider:
When might you need this money and do you have any additional funds available? Consider your liquidity needs as your money will be tied up for a period of time and early withdrawal may result in loss of part of your return and/or your initial deposit. Fixed rate bonds are also likely to have penalties for cashing in before the end of the fixed term which is normally linked to a period of interest (for example, six months). This amount could be higher or lower than the loss for early withdrawal from a structured deposit. As with any fixed term plan, it is therefore prudent to make sure that you have sufficient savings set aside before investing in structured deposits.
Determine whether you have the risk appetite for these products. Structured deposits are riskier than normal fixed deposits as there is a risk that the underlying investment does not perform in the manner required in which case you may not receive any returns at all. In this scenario you would have been better off with a fixed rate bond. You should understand the risks involved and what will happen in a worst-case scenario and if you are unsure, seek financial advice from a professional.
One of the major risks to consider for fixed rate bonds is that your money loses value in real terms should it fail to keep up with inflation. Although inflation is historically low at present, so too are he returns available on fixed rates. Therefore, although you have the peace of mind of a guaranteed return, this is not guaranteed to keep up with increases in the cost of living and so your initial deposit plus any interest could in the future be worth less in real terms.
Since the returns from structured deposits are dependent on the performance of an underlying investment such as stock market indices or shares, you should understand how the performance of the investment affects the return on your deposit. Remember that past performance is not a guide to future performance.
Terms and Conditions
Read the terms and conditions and other documentation of the structured deposit carefully before making any commitment. If you do not understand how the product works, seek clarification. Do not buy anything you do not understand.
Structured deposits compared to fixed rate bonds
This table compares the main features of structured deposits and fixed rate bonds:
||Fixed rate bonds
||Structured deposits sometimes require a higher minimum investment amount (usually £3,000) but there are some providers who offer lower minimums of £500.
||The minimum amount for a fixed deposit is normally around £1,000 but note the recent trend for providers to offer tiered interest rates where the higher headline rates are only on offer for larger lump sums.
||Structured deposits have maturity periods that vary from 3 years to 6 years.
||Fixed rate bonds normally have maturities ranging from 9 months to 5 years although there are some who offer shorter terms.
||Some structured deposits incorporate the potential to mature early each year, currently from as early as year 3 onwards. In this situation, you will normally receive a return of your initial deposit along with any stated returns.
||Fixed rate bonds do not normally have the ability to mature early.
||Your initial deposit will be repaid in full: (i) At maturity; or (ii) If the bank redeems it before maturity. This will apply only if your structured deposit includes an option that enables the bank to redeem or “call” the deposit before the maturity date for reasons specified in the terms and conditions – this is normally dependent on the performance of the underlying investment.
||Your initial deposit will be repaid in full at maturity.
|Early withdrawal by the depositor
||If you withdraw your deposit before the maturity date, you may lose part of your return and/or initial deposit. The amount that you will be paid depends on the market value of the underlying financial instrument that your structured deposit is tied to, which cannot be pre-determined. You should also bear in mind that structured deposits may be subject to periodic valuation, which may not be on a daily basis. This means that you may not be able to withdraw your deposit immediately. Check the terms and conditions for early withdrawal of the deposit with your bank.
||If you withdraw your fixed deposit before maturity, the bank may levy certain charges. In most cases, your bank would have taken a corresponding commitment on your deposit with a counterparty.When you withdraw your deposit early, your bank may have to levy charges to cover the cost of its own commitment. Check the terms and conditions for early withdrawal of the deposit with your bank.
||Structured deposits are generally less risky than investing directly in the underlying investment since the bank is obliged to repay the principal in full at maturity or when it redeems the deposit before the maturity date.However, they are riskier than traditional fixed rate deposits because their returns are dependent on the performance of the underlying investment. In some scenarios, you may get no returns at all and only get back your initial deposit. Where a structured deposit is callable, you may be exposed to reinvestment risk. This is the risk of having to invest your money in a low interest rate environment when interest rates fall. Structured deposits have maturity periods that vary from 3 to 6 years and are designed to be held for the full term which means that you may not be able to use your money for other purposes before maturity, for example, investing your funds in a fixed rate bond or an alternative savings plan offering higher interest rates when interest rates rise. Structured deposits are exposed to the credit risk of the deposit-taking institution (for example, a bank). This is the risk that the deposit-taker will be unable to fulfill its obligation to pay you even your initial deposit should it fail and become insolvent. However, in this situation it is likely that you would be eligible to claim under the Financial Services Compensation Scheme, depending on your individual circumstances.
||Fixed rate bonds are considered low-risk as the interest payable is known at the outset and your initial deposit is fully capital protected. Fixed rate bonds are similarly exposed to the credit risk of the deposit-taking institution being unable to fulfill its obligation to pay you the deposited sum. However, in this situation it is likely that you would eligible to claim under the Financial Service Compensation Scheme.The impact inflation can have on your overall return is an important risk to be aware of since if the rate of return you commit to is lower or become lower than inflation during the fixed term, the purchasing power of your capital will be eroded and you may be unable to surrender without incurring penalties.
|Financial Services Compensation Scheme
||Structured deposits are covered by the Financial Services Compensation Scheme which covers deposit claims up to a maximum of £85,000 per person, per institution, subject to your individual circumstances.
||Fixed rate bonds are also covered by the Financial Services Compensation Scheme up to £85,000 per person, per institution.
||Structured deposits generally offer the possibility of higher returns compared to fixed rate bonds of similar duration. This is in line with the higher risks you have to bear since the return on a structured deposit is dependent on the performance of the underlying investment (such as stock market indices or shares) to which it is linked – if this does not perform as required, you may not get a return.
||Returns on fixed rate bonds are typically lower as they are less risky than structured deposits. This is because the deposit is fully capital protected and the rate of interest paid is fixed at outset and guaranteed to be paid provided you do not withdraw your money early and the provider does not become insolvent.
The final analysis
Fixed rate bonds pay a fixed rate of interest at predetermined times throughout the fixed term, so you know exactly what you will receive and when you will receive it, giving you certainty of interest and the peace of mind which this entails. Unfortunately times have changed. One of the main reasons for the increase in popularity of structured deposits has been the over-reliance of fixed rate bonds by savers who are now seeing the real value of their savings eroded at a time when they need it most.
Structured products combine capital protection with the potential to receive higher rates than available from fixed rate bonds. Since there is the potential to achieve only a return of initial capital, structured deposits are not however designed to meet the needs of every saver nor, perhaps, to receive your entire savings. Ultimately, which option or blend of options will depend entirely on your individual circumstances.
Weighing up all of the options
These are difficult times to say the least and in recent years it is the saver who has perhaps suffered more than anyone else. Record low savings rates continue, low wage increases have affected both private sector and public sector employees alike. Understanding the impact of low rates, especially over time, and giving full consideration to all of the options available, particularly using your ISA allowance, are all good reasons to compare traditional savings accounts with alternatives such as structured deposits.
There is a wide variety of structured deposits being offered in the market and as market conditions allow, these are constantly being updated with new versions of previous issues as well as completely new plans. We at Fair Investment Company aim to provide you with a continuous selection of the best the market has to offer so keep coming back to visit us.
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular plan. If you are at all unsure of the suitability of a particular product, both in respect of its objectives and its risk profile, you should seek independent financial advice.
Some of the plans referred to in this article are structured deposit plans that are capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index and any of it shares is not a guide to its future performance.
Tax treatment depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.