Defensive investment plans have grown in popularity as they offer investors who are not confident the markets will rise further the opportunity to produce a competitive return on their capital. But the start of the New Year has brought with it increased volatility in the market and it is against this backdrop that we review Investec’s FTSE 100 Defensive Growth Plan. So how does this latest addition to their range of fixed term defensive investment plans stack up?
Apart from a few days during the summer and mid-December last year, the FTSE 100 Index had closed above 6,000 points on every day between 2013 and 2015. The lowest level was on 24th August 2015 when the Index closed at 5,898 points whilst the highest closing level over this period was 7104 towards the end of April last 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 ever last March.
2016 and beyond
Whilst the FTSE has remained at what are historically high levels, defensive investment plans that offer the potential for investment level returns even if the stock market fails to rise or, in some scenarios, even falls slightly, have been an increasingly popular choice with our new and existing investors. However, the start of the New Year has already brought with it a rather different investment landscape. The FTSE opened 2016 at 6242.3 and yet closed last night at 5779.9, a drop of 462.4 points which is equivalent to a 7.4% fall in value. By any standards this is a sizeable reduction.
Please note that past performance of the FTSE 100 Index is not a guide to its future performance.
So what might this mean to us as investors and where do think the FTSE might go in the medium term? Well, if you have doubts that it will continue to reach the 7,000 point mark again in the coming years, or indeed surge pass this level, then this latest new launch from Investec might just be worth a closer look.
In a nutshell
The FTSE 100 Defensive Growth Plan aims to provide a fixed return of 36% at the end of the six year term and will do so provided the value of the FTSE at that point is higher than 50% of its value at the start of the plan (subject to averaging). Therefore, the FTSE can fall up to 50% and investors would still receive a 36% growth return, along with a full return of their original capital.
If the Index has fallen by 50% or more at the end of the term, no growth will be achieved and your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.
36% return even if the FTSE falls up to 50%
This is a strong headline since investors will receive a positive return, even if the FTSE falls up to 50%. This means that even if you are not confident the FTSE will rise at all, you could still receive a fixed return of 36% unless the FTSE falls by 50% or more. The 36% return is equivalent to 5.25% compound annual growth.
Since the fixed return on offer is dependent on the performance of the FTSE 100 Index, the defensive element of the plan is an important one to understand. Rather than the Index having to finish higher than its value at the start of the plan, the Index can fall up to 50% and the fixed return of 36% is still paid. Whilst the FTSE continues to remain at what are historically relatively high levels, this ‘defensive’ feature could be an appealing one.
The use of averaging
Whether the plan pays the 36% fixed return is determined by comparing the value of the FTSE 100 Index at the start of the plan (the closing level on 1st March 2016), with its value at the end of the plan or the ‘Final Index Level’. When calculating the Final Index Level the plan takes the average of the closing levels of the Index on each business day during the last 6 months of the plan term. The use of averaging can reduce the adverse effects of a falling market or sudden market falls whilst it can also reduce the benefits of an increasing market or sudden increases in the market during the last six months of the plan.
Some capital protection from a falling market
Provided the FTSE 100 Index has not fallen by 50% or more at the end of the term, the 36% growth return is paid to you along with a full return of your initial investment. Should the Index have fallen by 50% or more your initial investment is reduced by 1% for each 1% fall. In this case you would lose at least 50% of your capital.
Since the market can fall up to 50% before your initial investment is at risk, the plan offers some capital protection against a falling market. This should be considered in conjunction with the potential return on offer when reviewing the plan’s overall risk versus reward.
Defined risk and defined returns
One of the features of this plan 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 stated level of growth as well as a return of your initial investment.
Please note that the first issue of this new plan is only available as an ISA. The plan also accepts ISA transfers, from both Cash ISAs and Stocks & Shares ISAs.
Credit ratings and agencies
This plan is a structured investment so your initial capital is used to purchase securities issued by Investec Bank plc. These securities are structured in a way so that they provide the growth and return of capital as described and also means that Investec Bank’s ability to meet their financial obligations becomes an important investment consideration. If the bank fails or becomes insolvent, this could affect both the payment of any growth return as well as the return of your original investment and you would not be covered by the Financial Services Compensation Scheme for default alone.
Fitch is one of the main global credit rating agencies and as at 27th October 2015, Investec Bank plc has a credit rating of BBB with a stable outlook. The ‘BBB’ rating denotes a good credit quality with low expectations of default risk. The stable outlook indicates that the rating is not expected to change in the short to medium term, i.e. in the next 6 months to 2 years.
Investec Bank plc profile
Investec is an international specialist bank and asset manager with its main operations in the UK and South Africa. Established in 1974, they currently employ around 8,200 people and as at April 2015, look after £124.1 billion of customer assets. 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.
Fair Investment view
Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “With a product headline of a 36% growth return unless the FTSE 100 Index falls by 50% or more, the risk versus reward of this plan is relatively easy to understand. Whilst the FTSE continues at what are historically high levels it is understandable why many investors are considering defensive investment plans, and so depending on your view of what will happen to the Index in the medium term, the ability to produce over 5% compound annual growth provided the market does not fall 50% could be a compelling one.”
The plan is open for New ISA investments up to the £15,240 allowance for the current tax year (2015/16) as well as Cash ISA and Stocks & Shares ISA transfers. The minimum investment is £3,000.
Click here for more information about the Investec FTSE 100 Defensive Growth 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 of ISAs 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 or switching 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. 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.
Last updated: 15/02/2016
The need for income remains firmly at the top of the investor’s New Year priority list and as the hunt for high yield opportunities continues, being able to understand and compare the numerous options available is more important than ever. So what better place to start 2016 than with our Investor’s Guide to Income where we give you an overview of the range of income options on offer, as well as compare some of our most popular investment ideas from last year and their main differences.
Why is income a top priority?
There’s no denying that generating an income is one the most common demands placed on our capital, even more so as low interest rates still appear to be with us for some time to come and there remains a significant question mark around what might happen to inflation in the coming years. Whilst annuity rates also remain comparatively low and many salaries are only just starting to keep up with the real cost of living, it is understandable why income remains a top priority, regardless of our stage in life.
Trends from the last couple of years show that there have been record numbers of ISA savers using the investment element of the New ISA allowance, revealing that many are looking to take on more risk than before in an attempt to try and produce the levels of income previously enjoyed. So as 2016 gets underway, this brief investor’s guide to income is the start of the income and ISA themes that we will develop throughout the year as the demand for innovative income investments continues and ISA savings take on an increasingly important role. So what are the main areas for consideration?
Open ended or fixed term?
Most investors who have had income investments in the past are likely to have at least considered an open ended investment fund. Here, your investment is pooled together with those from other investors which combined make up a single fund. Your investment buys units in that fund at the prevailing price, which is normally priced daily based on the value of the underlying holdings. The majority of income funds are actively managed, which means that an investment manager, often supported by a team of analysts, researches companies and then invests accordingly, moving in and out of companies in line with fund’s investment objective and depending on their view of where income, and perhaps growth, can be achieved.
Since there is an ongoing management of the fund, there is normally an annual fund management charge along with additional charges for the platform and/or service within which you hold the fund. Open ended funds, as the name suggests, are designed to carry on regardless of whether new investors buy in, or existing investors sell their investment. The investor is therefore in control of when they buy the units in the fund, as well as when they decide to sell them, the price of which can go up and down on a daily basis depending on where the fund is invested and the performance of those assets.
Fixed term investments on the other hand last for a defined term, known at outset, and is normally around five or six years. Although most of these investment plans offer a daily secondary market price, which can be higher or lower than the price at the start the plan (and in this respect not dissimilar to investment funds), these investments are designed to be held for the full term. The fixed term may appeal to those who wish to plan around this and it also removes what can often be the difficult decision of when to sell or switch your existing investments.
Fixed income versus variable income
Income funds can be broadly split between two types, both of which offer variable income which means it can go down as well as up. Firstly, those funds which invest in companies (shares) and use dividends to provide income, for example funds in the UK Equity Income sector. One such fund and one which now has over 12 months trading history behind it, is the first fund offered by Neil Woodford’s new venture, the CF Woodford Equity Income fund, which targets a 4% income yield each year and pays quarterly.
The second type is those funds which use corporate bonds and/or gilts to provide income, such as Royal London’s Corporate Bond fund. This fund is Silver rated by Morningstar OBSR and has a current distribution yield* of 4.42% with quarterly income payments. Since the market value of both types of funds can fall as well as rise over time, so can the value of your units and since the fund manager will buy and sell different company shares or bonds depending on their view of the market, so too will your income vary.
Investment plans on the other hand can offer either variable income or fixed income. They differ from investment funds since they offer a defined return for a defined level of risk, known at the outset and prior to investing. One popular example of a variable income is the FTSE Contingent Income Plan from Focus (Credit Suisse acting as the counterparty), which offers up to 7.0% each year with a 1.75% income payment made at the end of each quarter provided the FTSE 100 Index closes at or above 75% of its value at the start of the plan (i.e. it can fall up to 25% and you would still receive an income payment). If it closes below this level, no income will be paid for that quarter. Capital is at risk if the FTSE falls by more than 40%.
With fixed income investment plans you know exactly what you will be paid, when and for how long, which has its obvious appeal for those looking to plan for the future and are seeking a regular and defined income. The Enhanced Income Plan from Investec has been our most popular income investment over the last few years with the current issue paying 5.28% annual income, regardless of what happens to the stock market. Since most yields on income investments are variable, this type of plan offers a unique and potentially attractive income alternative in the current climate. Capital is at risk if the FTSE falls by more than 50%.
Monthly or quarterly payments?
Another important feature of income investments is how often income is paid out. The most common payment frequencies are bi-annually, quarterly and monthly, with the more regular frequencies usually being the most popular with investors. These investments therefore provide a regular opportunity to receive an income, although different investment funds have different payment frequencies with many bond funds offering monthly income, whilst equity funds normally pay quarterly and, more rarely, twice yearly.
Investment plans normally offer monthly or quarterly payments. The Enhanced Income Plan mentioned above offers a fixed payment each month, currently at 0.44% of your initial investment, and since monthly income can be the most useful in terms of budgeting and when looking to supplement existing income, this payment frequency is often the most sought after. The FTSE Contingent Income Plan offers a potential income each quarter.
Conditional capital protection versus diversification
Conditional capital protection
Investment plans include what is known as conditional capital protection. This means that your initial capital is returned at the end of the investment term, as long as the underlying investment (for example, the FTSE 100 Index) has not fallen below a fixed percentage of its value at the start of the plan, normally 50%. This therefore offers some capital protection against a falling stock market. Your capital will be at risk if the underlying investment does fall below the defined level, in which case your initial capital will be reduced by 1% for each 1% fall, so there is the chance you could lose some or all of your initial investment.
Your capital in an investment fund is at risk based on the value of the underlying holdings, which can go up or down on a daily basis. As such, there is no capital protection offered, nor is there the conditional capital protection associated with fixed term investment plans. However, since most funds invest in multiple holdings (equity funds between 30 and 90, bond funds often over 100), the impact of one of the underlying holdings falling significantly in value is reduced – this is commonly known as diversification. Investment funds also have the opportunity for capital growth should the value of the underlying investment rise in value, a feature which is not usually available within income investment plans.
Unlike a fund, fixed term investment plans use your investment to purchase securities issued by the counterparty (usually a retail or private bank), which means that their ability to meet their financial obligations becomes an important investment consideration. This is known as counterparty or credit risk and means that in the event of the bank’s insolvency, you could lose some or all of your initial capital as well as any rights to future income, and these investments are not covered by the Financial Services Compensation Scheme for default alone. There are various global credit rating agencies which assist in determining the potential credit worthiness of these institutions.
Risk versus reward
When considering income investment options it is important to understand the principle of risk versus reward, which means that the opportunity to receive a higher income than might be available from cash deposits inevitably requires the investor to put their 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 (for example, five years) and then consider whether you are comfortable with the additional risk you are taking in order to receive either a high fixed return or the potential for a higher variable income.
Leading five year fixed rates are currently offering around 3% and so by accepting risk to your capital, the potential income over and above this (along with the potential for capital growth where relevant), allows the income investor to decide whether they are comfortable with putting their capital at risk in return for the yields on offer. Any conditional capital protection should also be a consideration, as should the potential to protect your income from the effects of inflation over time.
Use your New ISA allowance for tax free income
By contrast to the interest rate environment, the prominence of ISAs has moved forward considerably since the significant increase to the annual ISA allowance was introduced in July 2014. The current allowance is now £15,240 and since the distinction between Cash ISAs and Investment ISAs (or Stocks & Shares ISAs) has been removed, you can now place up to the full allowance in one or a mixture of both, and you can also transfer from one to the other without restriction. It is therefore up to you to decide how much of your ISA portfolio is put into cash and investments.
One of the main benefits of an ISA is that income is received tax free and with no further tax to pay. This is particularly attractive for income that would normally be subject to income tax (for example, interest from deposit based savings, most investment plans and income from bond funds) where the impact of tax can be significant, especially over time. With the lowest marginal rate of income tax currently standing at 20%, this is a sizeable reduction to any stated returns on offer. Remember that tax treatment of ISAs depends on your individual circumstances and may be subject to change in the future.
Fair Investment conclusion
Commenting on the range of income investments available, head of savings and investments at Fair Investment Company, Oliver Roylance-Smith, said: “Investment funds have traditionally been the more popular choice for income investors with varying investment objectives and a wide range of underlying investment styles and sectors to choose from. These also bring with them diversification benefits of spreading your investment across a number of different companies or bonds, as well as the potential for capital growth in addition to a regular income stream.”
He continued: “As an alternative to open ended investment funds, the defined return and defined risk offered by fixed term investments offer investors a different approach to achieving income. Their conditional capital protection also means that your initial investment has some protection against a falling market. Combined with either a fixed or variable income and these plans can offer a competitive balance of risk versus reward.
In conclusion, whichever route your choose, the market for income investments can be full of attractive headline yields but it is important to fully understand how each investment works and the risks it entails. Whether this is inflation risk, risk of capital loss or fluctuating yields, it should always be remembered that it is the income and capital loss/rise combined that produce your overall return.”
We have a number of fixed term investment plans which offer either a fixed income or a variable income based on the performance of the underlying investment.
Click here to compare our current selection of income investment plans »
Fair Investment Fund Supermarket
With over 3,300 clean (non-commission) share class funds and access to over 200 fund groups, the Fair Investment Fund Supermarket offers a vast choice of income funds, many of which have 0% initial charge and low annual management charges, including low cost tracker funs, bond funds, UK equity income, global income and managed funds.
Click here to compare our current selection of income investment funds »
Click here for more information about the Investec Enhanced Income Plan »
Click here for more information about the Focus FTSE Contingent Income Plan »
Click here to compare UK Equity Income investment funds »
Click here to compare Bond Income investment funds »
* The distribution yield reflects the amounts that may be expected to be distributed over the next 12 months as a percentage of the Fund’s net asset value per share as at the date shown. It is based on a snapshot of the portfolio on that day. It does not include any initial charge and investors may be subject to tax on distributions.
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. Fair Investment Company does not offer advice and any investment transacted through us in on a non-advised basis. 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 of ISAs depends on your individual circumstances and legislation which 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.
Structured investment plans 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 its future performance.