Monthly archive for October, 2015
Last updated: 05/01/2016
Although there are many reasons why investors ultimately decide to go ahead and invest or not, timing the stock market is one of the most commented areas in investor behaviour. So what market conditions lead us to consider whether now is the right time to invest or not? Perhaps two of the most common are when markets are trading at historically high levels, and when markets are particularly volatile. Therefore should both of these market conditions prevail at the same time, which we have experienced during 2015, then the self-questioning around whether to invest can increase significantly.
With this in mind, we take a look at a selection of investments that can still achieve 10%+ growth returns, even if the underlying investment has only risen by a very small amount or, in some cases, has even gone down slightly.
Popular in all markets?
By combining the ability to produce high growth returns, along with some capital protection against a falling market, these kick out investment plans offer a fairly unique blend of risk versus reward which has the potential to appeal to investors in a wide range of prevailing investment conditions. Although notably this type of investment has proved popular when markets are low (on the basis that the investor considers it more likely that the index will rise), these plans have also generated particular interest when markets are at historically high levels, as they have been for periods during 2015.
The potential for high returns
Whenever investors are considering when to invest and where to put their capital, perhaps the most appealing feature is the potential return on offer. All of the investments covered below offer a minimum of 10% for each year invested (not compounded). On the basis that a 7% return on your capital could be considered an investment level return, these are considered to offer the potential for high growth returns.
Example – potential 10.0% after just 12 months…
“The FTSE/STOXXX Defensive Kick Out Plan from Focus offers 10.0% 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 specified level at the end of each year. If either or both Indices close below the required level each year, no growth return will be paid and your capital is at risk if one or both Indices has fallen by more than 40% at the end of the plan, in which case you could lose some or all of your investment.
Depending on your view of the UK and European markets, this plan could offer a compelling combination of high growth potential along with some capital protection should markets fall.”
Click here for more info »
Returns even if the market stays relatively flat
Many kick out investments are designed to provide returns even if the market has stayed relatively flat. This means that even if the stock market has only gone up by a small amount, you would still receive the full growth return. So if you’re not convinced the markets will rise in the future and yet still wish to achieve double digit returns, the opportunity to beat the stock market in conditions such as these could be a compelling investment story, and perhaps helps to explain why this type of investment has proved particularly popular with our investors.
Example – potential 10.0% even if the FTSE only rises a little
“The Enhanced Kick Out Plan from Investec will return 10.0% for each year invested (not compounded) provided the value of the FTSE 100 Index at the end of each plan year is higher than its value at the start of the plan (subject to averaging). If the FTSE is lower at the end of every year, no growth will be achieved and your initial investment is returned in full unless the FTSE 100 Index falls by more than 50% during the term, in which case you could lose some or all of your initial investment.
This plan is one of our best selling growth investments and the potential 10.0% on offer from this latest issue is its highest headline return seen since the start of 2013.”
Click here for more info »
Double digit returns even if markets fall slightly
There are also a number of kick out plans that will provide double digit growth returns even if the underlying investment(s) falls slightly, for example up to 15% or 20%. 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. Whilst stock markets remain at what are historically still relatively high levels, this can prove to be a popular feature.
Example – potential 12.0% each year, even if markets fall up to 20%
“The Investec Dual Index Step Down Kick-Out Plan offers 12.0% 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 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 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 50% during the term of the plan. If this does occur, your capital is at risk depending on the worst performing Index and so you could lose some or all of your investment.”
Click here for more info »
Some capital protection from a falling market
When comparing the risk versus reward of any investment it is important to understand the circumstances when your initial capital could be lost. With kick out investments your original capital is returned if the plan kicks out, but should this not occur then typically your capital will be returned provided the underlying investment has not fallen below a certain amount, 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 (27/10/2015) opening value of 6,471.0, the Index would have to fall to a closing level of 3,235.5 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.
Understanding 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, for example, 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.
Defined return, defined risk
One of the main features of kick out investments is that the potential returns on offer are stated up front, and so are known before you commit your capital. 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 achieve any stated returns as well as a return of your initial investment. This can then be used to make an informed decision about whether to proceed or not by comparing the defined return and defined risk with alternative investments.
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.”
Click here for the latest kick out investments »
Click here for the latest defensive kick out investments »
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 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.
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 also 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.
RCI Bank is a relative newcomer to the UK, but is currently offering some of the best deals out there. We take a closer look at their story as well as reveal their market leading and award winning instant access account and their top fixed rate bond deals.
The story behind RCI Bank is a unique one since it originated from the Renault Group, one of the world’s largest car companies. Developed as their own internal bank, RCI Banque was founded in 1974 and was created in order to meet the need to help customers finance their vehicles. Forty years later and the RCI Banque group is still privately owned by the Renault Group and operates in 37 countries across every continent, lending over €12 billion a year. RCI Bank launched in the UK in 2015 in conjunction with RCI Financial Services who combined have over 200 staff and lend over £2 billion each year.
Despite only launching earlier this year, RCI Bank already has a compelling range of award-winning products. With a range covering a market leading instant access account and fixed term savings accounts up to two years, the focus is on relatively short term cash, which should appeal to anyone with half an eye on future interest rate rises.
Market leading instant access: offering 1.65% AER
The Freedom Savings Account is currently offering 1.65% AER variable gross, which is market leading for this type of account. This top rate is available to both new and existing customers and is free from notice periods, penalties, bonus periods, tiered rates and fees (although a £15 fee for CHAPS transfers applies). What you see is what you get, which perhaps also explains why it has been given a Moneyfacts rating of Outstanding*.
The account is available as a single or joint account and is free to use so you can make unlimited payments and withdrawals without charge. You have the option of interest being paid monthly or annually which will also compound provided you don’t move it to another account. There’s no limit or fees on the number of withdrawals you can make and it can be opened with a low minimum of just £100. You can apply online and RCI Bank state opening an account takes less than 15 minutes, whilst you also benefit from full UK customer support available 7 days a week
Click here to find out more about the RCI Bank instant access account »
RCI Bank short term fixed rate bonds: up to 2.35% AER
For those who are able to tie their money up for a fixed period and are also looking for a competitively priced fixed and regular rate of interest, RCI Bank also offers a duo of fixed rate savings accounts, over one and two years respectively. As you would expect, the rate of interest increases with the fixed term, the 1 year fixed term deposit offering 2.06% AER while the 2 year fixed term deposit is currently paying 2.35% AER. Both accounts have a Moneyfacts rating of Excellent*.
These fixed term deposits offer a guaranteed rate so you’ll know exactly how much you will earn by the end of the fixed term, whilst interest can be paid monthly or annually and can be compounded. Both deposits also give you the flexibility of unlimited top-ups for 30 days from your application however you cannot close your account once opened or make a withdrawal before the end of the term. You can apply online and the account has a low minimum of £1,000.
Click here for more info on the RCI Bank 1 Year Fixed Term Savings Account »
Click here for more info on the RCI Bank 2 Year Fixed Term Savings Account »
Deposit Guarantee Scheme
Deposits held with RCI Bank are not covered by the UK Financial Services Compensation Scheme but instead fall within the scope of the French deposit protection scheme, known as the FGDR or Fonds de Garantie Dépôts et de Résolution. Eligible deposits with RCI Bank are protected, and all of the accounts above are covered by the FGDR, protecting the first €100,000 per customer within the RCI Banque group. As with the FSCS, the protection covers each customer rather than each account and for joint customers, each customer is protected up to €100,000 (so up to €200,000 between them). Since the maximum eligible is based in Euros, the UK sterling equivalent at any given time will depend on the exchange rate between the British Pound and the Euro.
Further information – FDGR
Created by law, the FGDR compensates depositors for an amount up to €100,000 per person, per institution, when a banking institution fails. This guarantee benefits all bank customers, private individuals, businesses of any size and associations. For more information and to check their status, visit www.garantiedesdepots.fr/en.
* Moneyfacts awards valid as at 01.10.2015
AER stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.
Last updated: 10/11/2015
By combining a high level of regular fixed income with some capital protection against a falling stock market, the Enhanced Income Plan from Investec Bank sits somewhere between a fixed rate bond and directly holding a dividend yielding share. As the demand for income, whether fixed or variable, remains high on the agenda for both savers and investors, we take a look at what makes this one of our best-selling income investments.
The best just got better
The Enhanced Income Plan is a relatively straightforward plan to understand. It pays a fixed rate of income, every month, for a fixed term, with your money back at the end of the term unless the FTSE 100 Index falls more than 50% below its value at the start of the plan. The current version offers investors a fixed income of 5.28% each year, which is the highest rate we have seen for nearly a year.
What is driving customers?
This is our best-selling income investment plan. Whether you are working and need to supplement your earnings, or retired and looking at options for your pension or ways to add to your pension income, the need for income is one of the most common demands put on our capital. Traditional income solutions often focus on fixed rate bonds at the capital protected end of the risk spectrum, to yield targeting investment funds or shares at the fully capital at risk end. This investment combines some of the most popular elements of the two.
Invest in the FTSE now?
Apart from a few blips, most recently in recent months, investing in the stock market over the last couple of years will have mostly been a rewarding experience, culminating in the FTSE breaking through the 7,000 barrier for the first time in history. And yet despite the attractive dividend yields we have seen from a number of our largest companies, whilst the FTSE 100 Index remains volatile and at record high levels, there are many investors who remain uncertain about the level of income that might be enjoyed in the coming years. Remember, it is the income and any capital loss/rise combined that contribute to your overall return.
Where have all the fixed rates gone?
In contrast to the growth of the FTSE, savings rates are still at record lows and with no realistic prospect of any sudden sharp increases let alone a return to the rates of yester-year and those heady days of 5% plus interest rates, whatever your situation the ability to meet income needs remains a very real challenge. But against this backdrop of intense pressure on savers, and whilst stock market conditions perhaps raise more questions than they do answers, this investment from Investec has remained a top seller with income seekers. So let’s take a look at its main features…
With savings rates at such low levels, the prospect of a high fixed income is an attractive one. Unusual for an investment which normally pay a variable income dependent on the performance of the underlying asset, this plan pays a fixed income regardless of the performance of the stock market. The current issue of the plan is paying 5.28% p.a. fixed, which means that the investor has the certainty of knowing at the outset exactly how much they will receive each and every year.
Another popular feature is the monthly payment frequency since this is the most useful in terms of budgeting, especially when many UK equity income funds only offer twice yearly or quarterly payments. Therefore, not only does the investment provide a high level of fixed income, but it also pays this on a monthly basis, which could be an important feature when looking to supplement existing income. At 5.28% on offer from the current version, this equates to 0.44% paid each and every month for the entire term of the plan.
The Enhanced Income Plan has a six year fixed term and although you do have the option to withdraw your money early (and in this respect is not dissimilar to investment funds), the plan is designed to be held for the full term and early withdrawal could result in you getting back less than you invested.
Many savers will be used to a fixed term whilst this feature should also appeal to those who wish to plan around this accordingly. Combined with a fixed and regular level of income, this also means that full plan terms are known at the outset and so investors can consider more clearly the risk versus reward prior to investing their capital.
Conditional capital protection
When considering investment options it is also very important to understand the balance of risk versus reward. Inevitably, the opportunity to receive higher returns than might be available from cash deposits requires the investor to put their capital at risk.
The Enhanced Income Plan contains what is known as conditional capital protection which means that the return of your initial investment is conditional on the FTSE not falling by more than 50% of its starting value. If the FTSE stays within this 50% barrier throughout your investment then you will receive a full return of your original investment but if it falls below, and also finishes lower than the starting value, your initial investment will be reduced by 1% for every 1% fall in the FTSE. Therefore your capital is at risk and you could lose some or all of your initial investment.
Credit ratings and agencies
Unlike a fund, your investment is used to purchase securities issued by Investec Bank plc and so their ability to meet financial obligations becomes an important consideration. Fitch is one of main global credit rating agencies and awarded a credit rating of BBB- with a stable outlook (awarded 22nd January 2014).
The ‘BBB’ rating denotes an adequate capacity for payment of financial commitments although adverse business or economic conditions are more likely to impair this capacity with the ‘-‘ signifying it is at the lower end of this rating grade. The stable outlook indicates that the rating is not likely to change in the short to medium term, i.e. in the next 6 months to 2 years.
Investec Bank plc
Investec is an international specialist bank and asset manager with its main operations in the UK and South Africa. Established in 1974, as at April 2015 they look after £124.1 billion of customer assets, employing around 8,200 people. 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.
Risk v reward
The principle of risk versus reward means that the search for potentially higher returns leads to the need to put your capital at risk. A good benchmark for assessing your investment is to compare what you could get from a fixed rate deposit over a similar timeframe and then consider whether you are comfortable with the risk to capital you are taking in order to receive the opportunity for a higher return.
Leading five year fixed rates are currently offering around 3.10%, and so by accepting risk to your capital, you are increasing your fixed return by around 2.18% a year (since the fixed income from this investment is 5.28%). With the market failing to meet the need for higher income, the decision is whether you are comfortable with putting your capital at risk and the conditional capital protection offered, in order to achieve the potential for a higher return.
Fair Investment conclusion
Commenting on the plan, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “One of the main attractions with the Enhanced Income Plan is the ability for potential investors to consider its risk versus reward prior to investing. The plan pays a fixed income, each month, for a fixed term – so you know exactly what you will receive, when, and for how long – whilst you get your capital back at the end of the term unless the FTSE has fallen by more than 50%.“
He continued: “Compared to other income investments, this defined return for a defined level of risk could be attractive whilst the monthly income and fixed income features are often high up on the list of priorities for income seekers.”
Click for more information about the Investec Enhanced Income 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 independent financial advice. Tax treatment depends on your individual circumstances and may change.
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. 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 its future performance.
As the Bank of England’s Monetary Policy Committee (MPC) has now held the base rate at 0.5% for over six and half years (the last vote was the 79th month in succession), we take a look at if there is any chance of a rise in sight and what the current outlook might mean for savers.
When will interest rates rise?
One committee member, Ian McCafferty, once again dissented from the other 8 members of the MPC and argued that the base rate should climb by 25 basis points (a quarter of a percent) to counteract any potential risk of inflation leaping beyond the 2% target in the medium term. However, despite Mr McCafferty’s dissension, most economists are still predicting that any rise in the base rate will not occur until early next year, a consensus predominantly based on beliefs that the UK’s growth will improve in its third quarter seeing price inflation rise gradually from the end of 2015.
Rather bleakly Bank of England Chief Economist Andy Haldane last month stated that “the case for raising UK interest rates in the current environment is, for me, some way from being made. One reason not to do so is that, were the downside risks I have previously discussed materialise, there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target.”
The International Monetary Fund (IMF) also warned at the end of its recent meeting in Lima that central banks risk another crash in the global economy if they do not continue to support growth with low interest rates. The future therefore remains uncertain although any interest rate rise, let alone a rise by more than 0.25 percent, seems very unlikely in the foreseeable future.
Latest inflation figures
The headline rate of UK inflation as measured by the Consumer Price Index (CPI) had been expected to remain at zero when official figures for September were released today (13/10/2015) however, the latest figures from the Office of National Statistics revealed a return to negative inflation as the rate fell to -0.1% today, the main contributors being a smaller than usual rise in the clothing prices and falling motor fuel prices. This will have a direct impact on the annual uprating of some benefits, of particular note the state second pension, which is linked to the September CPI rate.
The unemployment rate in the UK decreased to 5.5% from 5.6% in the previous period. Over the last 12 months employment levels are considerably higher with over 350,000 more in work than in the same time last year, signaling further strength of the labour market. The private sector’s annual pay growth has also risen and now exceeds 3%, however the Bank of England stated “Encouraging improvements in productivity growth have so far limited the impact of that pickup in pay growth on businesses’ overall costs, and therefore inflation.”
Short term view
In their latest report, the MPC stated the UK’s economic growth is experiencing a ‘gentle deceleration’ after peaking in 2014 and that it will ease back if the global economy weakens. However the central bank also reports that pressures in the UK’s labour market have been rising too slowly for inflation to return back to the 2% target, meaning it will likely stay below 1% until at least spring of next year.
Worst case scenario?
Against this economic backdrop, savers must consider that even when interest rates do begin to rise, will this in itself affect savings rates for the good? Certainly the traditional relationship between the Bank of England base rate and savings rates has been severed for some time and there is nothing in the economic outlook that suggests this will restored any time soon.
Savings rates in dire straits
Interest rates fell dramatically from when the Government’s Funding for Lending Scheme came into effect back in August 2012. This gave banks and building societies a cheap source of finance so they are not so reliant on savers to lend them money. Since then, banks and building societies have held a series of cuts to new savers and often, once they find themselves at the top of the best buy tables, they lower their rates to new savers as well.
Despite the introduction of so called ‘challenger banks’ into the hunt for our hard earned cash, whilst the Bank of England base rate has remained unchanged at 0.5%, interest rates remain at shockingly low levels by historical standards, which continues to pose difficult questions for savers.
Headline returns on fixed rate bonds, the traditional mainstay for many savers’ portfolios, remain poor. Leading one year fixed rate bonds currently offer around 2.10%, two year fixed rates around 2.35%, three year fixed rates around 2.70% and around 3.10% if you can fix for five years. This means that many maturing bond holders are still looking at sizeable falls in income when considering taking out another bond of similar duration.
Savers in trouble
The result is that many have moved away from longer term fixed rates in favour of instant access or short term fixes on the basis that something will happen relatively soon which will then spur them on to take further action. Although understandable, the above economic snapshot highlights this could be a very dangerous strategy indeed.
There are a number of alternatives available to traditional fixed rate savings plans. Since the returns are not always guaranteed, these are not for everyone and are unlikely to be the home for your entire savings pot. However, they do offer the potential for higher returns and with the current outlook for savers looking set to create further challenges, could be a worthwhile and timely consideration. Like fixed rate bonds, your initial capital is protected and is eligible for FSCS compensation up to the normal savings limits.
Diversifying savings portfolios to include a wider range of options offers the potential to provide the level of returns savers may need over the longer term. Indeed, with the current spread of low savings rates on offer, this is the only way to attempt to mirror the yields of yester-year, previously offered by the more traditional savings plans.
Weigh up the options
Ultimately, which option or blend of options will depend entirely on your individual circumstances however, these remain unusual and challenging times and traditional savings accounts are currently falling short of meeting the pressures put on saver’s capital by the continuing economic situation. As a minimum we should make sure that all of the options available are weighed up very carefully indeed.
Compare instant access savings »
Compare fixed rate saving »
Compare alternatives to fixed rate savings »
Compare peer to peer savings »
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.