Monthly archive for November, 2015

Defensive investment plans revealed – what you need to know

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Defensive plans offer the potential for investment level returns even if the stock market fails to rise, or, in some scenarios, even falls slightly. With the closing levels of the FTSE 100 Index (‘the FTSE’) remaining above 6,000 points for almost the entire period since the start of 2013, defensive plans have risen in popularity as investors who are not confident the markets will rise further still have the opportunity to produce a competitive return on their capital. With this in mind, we take a closer look at a selection of our defensive plans to find out exactly what they have to offer and how the risk versus reward might be appealing in the current investment climate.

FTSE levels

Apart from a handful of days during August and September of this year, the FTSE has closed above 6,000 points since the start of 2013. The lowest level was on 24th August this year when the Index closed at 5,898 points whilst the highest closing level over this period was 7104 towards the end of April this year. This level also represents the highest closing level of the FTSE on record, having broken through the 7,000 point barrier for the first time only in March earlier this year.

What is a defensive plan?

Therefore, by historical standards, the FTSE has spent close to three years at what are historically high levels. Partly as a result of this, there has been an increase in the number of plans that offer the potential for investment returns, even if the event that the market fails to rise. Collectively, these are commonly known as defensive plans.

Different types

Although each plan has its own characteristics, collectively they are growth investments which offer the potential for either a fixed return for every year invested (not compounded), or a multiple in any rise in the underlying investment but starting from a lower initial level (normally with a cap on the maximum growth return on offer).  Each of these investments will be structured to offer a defined return for a defined level of risk, and as such you will know from the outset exactly what must happen in order to receive the stated returns on offer.

A middle ground

Defensive investments therefore try and offer the best of both worlds by offering the potential for investment level returns, even if the underlying investment only rises by a small amount, stays flat, or with some plans even goes down slightly. This means they are designed for investors who have a neutral or negative outlook of what could happen to the stock market in the coming years, and yet who would still like the opportunity to receive the potential for investment level returns. With the FTSE at historically high levels, these could arguably offer a compelling investment opportunity.

Please note that past performance of the FTSE 100 Index is not a guide to its future performance.

Potential for enhanced returns – the defensive ‘supertracker’

The FTSE Defensive Supertracker from Meteor is a current example of the defensive supertracker. The ‘supertracker’ part means your investment tracks any growth in the FTSE 100 Index during the term of the plan and then triples it, whilst the plan is ‘defensive’ since this growth is based on any rise above 80% of the FTSE’s starting value.  Therefore, provided the FTSE has not fallen by more than 20%, you will receive triple any growth, subject to a maximum return of 60%, plus your capital back (that’s a 60% return even if the FTSE ends the same).

If the FTSE has fallen by more than 20%, no growth will be paid and your original investment will be returned in full unless the FTSE has fallen by more than 40%. This investment could therefore offer a compelling risk versus reward for those who are not convinced the FTSE will rise significantly in the medium term. However, if the FTSE has fallen by more than 40%, your capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Benefit from early maturity – the defensive kick out

If the FTSE had fallen by 5% in 3 years time and yet you still received 24% growth plus a return of your initial capital, would you consider this a good investment? Our range of defensive kick out plans offer up to 8.0% for each year invested (not compounded), even if the market falls up to 10%. The plans also offer the opportunity to mature early or kick out, as early as year 2 onwards, with different FTSE levels required depending on the individual plan.

The Investec FTSE 100 Defensive Kick-Out Plan will return 8.0% for each year plus a return of your capital provided the level of the FTSE at the end of each year from year 3 onwards, is above 90% of its starting value at the start of the plan. Meteors’ FTSE Defensive Kick Out Plan offers a marginally lower return of 7.75% in the event of kicking out but can mature at the end of year 2 onwards.

If with these plans the FTSE falls below the required level for each year, no growth will be achieved and you initial investment is returned in full unless the Index has fallen by either 40% or 50% (depending on the plan), measured at the end of the plan term. If it has, your capital will be reduced by 1% for each 1% fall and so you could lose some or all of your initial investment.

The potential for higher returns

Finally, the potential for higher returns is available if investors are prepared to take a higher level of risk, by having their return dependent on a small number of shares rather than an Index as a whole.  Mariana’s 3 Stock Defensive Consolation Plan offers the potential for 14.5% annual returns, as well as the opportunity to mature early, or ‘kick out’, after 12 months, and then after every six months thereafter.

The plan compares the value of three technology shares (Apple, Microsoft and Intel) at the start of the plan with their values at the end of the first year, and then each six months thereafter. If the values of all three shares are at or above their starting values your investment will end, returning your original capital plus 7.25% for each six months invested (not compounded). If one or more shares are below, the plan continues.

If the plan reaches the end of the six year term without kicking out, it also offers the opportunity for a ‘consolation’ return of 32% provided none of the shares has fallen by more than 50%. If one or more shares have fallen by more than 50% then no return will be paid and your initial capital will be reduced by 1% for each 1% fall of the lowest performing share, so you could lose some or all of your initial investment.

Fair Investment view

Commenting on the plans, Oliver Roylance-Smith, head of savings and investments at Fair Investment Company said: “Whilst markets remain at relatively high levels there is understandably a place for defensive investment plans. For those investors who are not confident that the market will rise by a healthy margin in the coming years, knowing that you can achieve 7%+ for each year invested regardless of whether the market goes up, remains flat, or even falls slightly, could be an interesting option.”

He continued: “Combining a competitive growth return with a full return of your initial capital unless the underlying investment falls by 40% or 50% also offers investors a defined return for a defined level of risk. This gives investors the ability to consider the risk versus reward of the plan prior to investing which could be appealing in light of the current investment climate.”

More information on the Meteor FTSE Defensive Supertracker Plan »

More information on the Investec FTSE 100 Defensive Kick Out Plan »

More information on the Meteor FTSE Defensive Kick Out Plan »

More information on the Mariana 3 Stock Defensive Consolation Kick Out Plan »

Click here to compare defensive investment plans »


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.

These 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 due to the performance of the FSTE 100 Index or three shares listed on the NASDAQ Index. 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 the FTSE 100 Index or any shares listed on the NASDAQ is not a guide to their future performance. As share prices can move by a wide margin plans based on the performance of shares represent a higher risk investment than those based on indices as a whole.

Investment Focus: Mariana 3 Stock Defensive Consolation Kick Out Plan

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With the potential for a high headline growth return, the latest version of this popular plan from Mariana offers those investors with a higher risk appetite, the potential for greater reward. In addition, this innovative investment plan combines the ability to mature early or ‘kick out’, along with the opportunity for a ‘consolation’ fixed return if the plan fails to mature. Here we take a closer look at the plan’s main features in order to better understand the risk versus reward on offer.

Plan snapshot

The 3 Stock Defensive Consolation Kick Out Plan has a maximum term of six years but offers the opportunity to mature early, or ‘kick out’, after just 12 months, and then at the end of each six months thereafter, dependent on the performance of three technology shares. If the plan kicks out, you will receive 14.50% at the end of year one, or 14.50% plus an additional 7.25% for each six months thereafter (not compounded). If the plan fails to kick out, there is also the opportunity for a ‘consolation’ return of 32% at the end of the fixed term, whilst the return of your capital is also dependent on the performance of the same three shares with your capital being at risk if any of them has fallen by more 50% at the end of the term, in which case you could lose some or all of your initial investment.

‘3 Stock’

Both the investment growth and the return of your initial capital are dependent on the performance of 3 shares. The three shares are well known technology businesses Apple Inc, Microsoft Corp and Intel Corp, all of which are listed on the NASDAQ stock exchange, the second largest stock exchange in the world. The closing levels of the shares are taken at the start of the plan and are then measured at regular intervals thereafter, known as kick out observation dates.

‘Kick Out’

The term ‘kick out’ refers to the ability of the plan to mature early, before the end of the maximum fixed term, or at the end of the plan, i.e. on any of the kick out observation dates, the first occurring after 12 months, and then every six months thereafter. On any such date, should all three shares be at or above the required level, the plan will kick out. If one or more of the shares end below the required level, the plan continues to the next observation date.

‘Defensive’

In determining whether the plan will kick out or not, the value of each share is taken at each kick out observation date and then compared with its value at the start of the plan. Should the value of all three shares be at or above 90% of their value at the start of the plan, your investment will kick out providing a 14.50% return at the end of year one, or 14.50% plus 7.25% for each additional six months invested thereafter (not compounded). This growth payment is made along with a return of your initial investment. The ‘defensive’ element to the plan refers to each share being able to fall up to 10% and the plan will still provide the investment return.

‘Consolation’ return

If the investment fails to kick out either during the plan or at the end of the fixed term, there is also the opportunity to receive a 32% fixed return, along with a return of your initial investment. This ‘consolation’ return is paid provided none of the shares has fallen by more than 50%, i.e. all three shares must end at or above 50% of their value at the start of the plan. If one or more shares have fallen by more than 50%, your capital is at risk.

Some capital protection from falling share prices

If the plan fails to kick out the return of your initial capital is also dependent on the same three shares. On the final day of your investment, should the value of the lowest performing share be less than 50% of its value at the start of the plan, your initial capital will be reduced by 1% for each 1% fall. If should be noted that in this situation, you would lose at least 50% of your initial capital, so although the 50% barrier provides some capital protection from falling share prices, there is the risk that you could lose some or all of your initial capital.

Higher risk

Therefore, the most important feature of this investment plan to consider is that the potential returns on offer, as well as what happens to your initial investment, are both dependent on the performance of shares rather than any stock market index. This makes it a higher risk investment as your growth return is dependent on the performance of individual shares rather than a broader exposure to the stock market as a whole offered by an index (such as the NASDAQ). In addition, this plan focuses on shares within the technology sector which can be volatile. These two factors should be carefully considered.

Greater rewards

The principle of risk versus reward means that the upside of taking on more risk is that the potential rewards are greater, which is indeed the case with this investment. The headline returns are high compared to those on offer from other kick out investments based on the performance of stock market indices. This investment therefore offers the potential for greater rewards than would be on offer if the plan was dependent on the performance of the NASDAQ Index.

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 October 1994, giving a total of 3,915 different hypothetical products. This analysis shows that a kick out occurred in 81.2% of scenarios, did not occur but investors received a full return of capital in 13.8% of scenarios and at least 50% of investor’s initial capital was lost in the remaining 5.0% of occasions.

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.

Commerzbank as counterparty

Structured investment plans use your investment to purchase securities issued by Commerzbank and so their ability to be able to meet their financial obligations becomes an important consideration. This is known as counterparty risk (or credit risk) and means that in the event of Commerzbank 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 19th October 2015, Commerzbank has been attributed a ‘BBB+‘ rating with a negative outlook. The ‘BBB’ rating denotes a good capacity to meet its financial commitments and repay debts but could be more susceptible to adverse economic conditions than companies in higher-rated categories, whilst the ‘+’ signifies it is at the higher end of the rating grade. The negative outlook indicates that the rating may be lowered in the short to medium term (between 6 months to 2 years).

ISA friendly

In addition to non-ISA investments, this plan also accepts Cash ISA and Stocks & Shares ISA transfers as well as New ISA investments (current tax year limit of £15,240). The minimum investment is £15,000.

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 any kick out investment. But with the potential for such high investment returns it is crucial that investors look carefully at the risks involved. For example, any growth return is dependent on the performance of three NASDAQ-listed shares and is therefore higher risk than a plan based on the NASDAQ Index, whilst the technology sector can be volatile. These should be key considerations. Investors should also note that all three shares need to meet the required level for the plan to produce an investment return.”

In conclusion, he said: “This plan may however appeal to investors prepared to take on a higher level of risk in return for higher potential rewards, whilst the 32% consolation return provides an innovative addition, and the 50% barrier offers some protection against falling share prices.”

Click here for more information about the 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 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.

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. Any return on your investment is not guaranteed and as shares prices can move by a wide margin plans based on the performance of shares represent a higher risk investment than those based on indices as a whole. There is a risk of losing some or all of your initial investment due to the performance of three shares listed on the NASDAQ 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 shares listed on the NASDAQ is not a guide to their future performance.

Experienced investor income and growth selections

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At Fair Investment Company there are a large number of our investors who decide to invest through us again and again, which is one of the reasons why for the last three years, our experienced investor section has risen in popularity. Whether this is reinvesting investments that have matured, adding new money to their investment portfolio, or a combination of the two, this section has proved popular with both new and existing customers. For this reason we will be bringing you a regular article covering some of the most popular investments featured in the section. Today we start with one income and one growth selection.

A wider range of investment selections

Designed to complement our range of savings and investment ideas, our experienced investor section was created to enhance our overall offering by featuring a wider range of innovative investment products. Aimed at both existing investors and those new to Fair Investment, the 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.

Fixed term investments

Many of our investors decide that an investment with a fixed term is the right way forward, which 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 many other types of investment.

Investment selections

Listed in the experienced investor section is our selection of plans whose performance will depend on a wider range of underlying investments, be this indices from the US or Europe as well as the UK, a blend of more than one index or perhaps a specific number of stocks targeted at a benchmark or sector.

Risk versus reward

As such the knowledge and experience required to review their risk versus reward and their potential as an investment opportunity is considered higher than for some of our other investment plans. Therefore these would 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.

Who is an experienced investor?

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.

Latest selections

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 look at two of our current selections, one income and one growth.

Income selection

Mariana FTSE S&P Range Income Plan

The Mariana FSTE S&P Range Income Plan offers up to 7.50% each year based on the performance of the FTSE 100 Index and the S&P 500 Index (made up of 500 of the largest companies in the US). Each Index is measured at the start of the plan, and then again at the end of each quarter. If both Indices are within the range of 70% and 130% of their starting level (i.e. they can fall or rise by up to 30%), a 1.875% income payment is made. If either index is outside of this range, no payment is made for that quarter.

The plan also offers some capital protection against the UK and US markets falling since your initial investment is returned in full unless one or both indices falls by 40% or more, 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 US markets will rise or fall by more than 30% over the medium term, this plan could be a timely opportunity whilst the quarterly payment frequency is likely to appeal to most income seekers. There are few investments out there offering up to 7.50% income whilst the 40% barrier for both indices offers investors some capital protection against falling markets.”

Click here for more information »

 

Growth selection

Meteor Dual index Kick Start Plan

The Dual Index Kick Start Plan from Meteor is a fixed term investment that will mature early or ‘kick out’ at the end of each year, 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 13.25% at the end of year one, or 13.25% plus an additional 10% for each year thereafter (not compounded).

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 13.25% 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 relatively flat, could be worth a closer look.”

Click here for more information »

 

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. Growth on your investment is not guaranteed and 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, the EURO STOXX 50 Index and the S&P 500 are not a guide to their future performance.