Last updated: 16/08/2016
A kick out investment is a fixed term investment plan that has the ability to mature early or ‘kick out’ each year, providing a fixed growth return along with a full repayment of your initial capital. Since these plans can produce competitive returns even if the market stays relatively flat, these investments seem to be popular in a wide range of market conditions. The current issue of the Enhanced Kick Out Plan from Investec offers the highest rate of any kick out investment based on the performance of the FTSE 100 Index, which perhaps helps to explain why it is one of our most popular investments with both our existing customers as well as new investors.
Here we take a closer look at the main features of the plan and review the risk versus reward on offer to see how this might make for an attractive opportunity in the current investment climate.
In a nutshell
The plan will return 9.50% per year (not compounded) provided the value of the FTSE 100 Index at the end of each year is higher than its value at the start of the plan – so although the FTSE does have to rise, this only needs to be by a single point. Should the plan kick out, your initial investment is also returned in full. If the plan does not kick out, your initial capital is at risk if the Index falls by more than 50% during the term, and also finishes below its starting value, in which case your capital will be reduced by 1% for each 1% fall.
The term ‘kick out’ refers to the ability of the investment plan to mature early depending on the performance of the FTSE 100 Index. Plans such as these that have the ability to mature early and provide a competitive level of growth have proved popular in recent years with a range of investors. For example, the fact that this plan can achieve investment level returns even if the market stays relatively flat means that investors have the potential to outperform the market. This scenario may appeal to those who are not confident the market will rise strongly in the coming years.
The potential for high returns
In addition to the opportunity for early maturity it is no doubt the potential for double digit returns that have added to this plan’s popularity. The headline return on offer from the current issue is 9.50% annual growth. The return is not compounded, but will be paid to you for each year the investment has been in place, thereby offering compelling returns even if the FTSE stays relatively flat or only rises by a small amount. If the plan does kick out, your initial capital is also returned to you in full along with the growth payment.
Some capital protection from a falling market
The Enhanced Kick Out Plan also includes what is known as conditional capital protection, which means that if the plan fails to kick out by the end of the six year term, 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.
If the Index falls more than 50%, and also ends the term at a level which is lower than its value at the start of the plan, your initial investment will be reduced by 1% for every 1% fall. In this situation there is a risk that you could lose some or all of your capital.
Defined risk and defined returns
Another feature 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 achieve the growth returns on offer, as well as a return of your initial investment.
Risk versus reward
The principle of risk versus reward inevitably leads to putting your capital at risk in the search for potentially higher returns. A good benchmark for assessing any 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 additional risk you are taking in order to receive the potential for a higher return.
Leading longer term fixed rates are currently offering around 2.20% and so by accepting risk to your capital, you are potentially increasing your returns by around 7.30% a year if the plan matures early or produces a return in the final year. The decision is therefore whether you are comfortable with putting your capital at risk and the conditional capital protection offered, in order to have the potential for this level of growth.
Credit ratings and agencies
Another important feature of this plan is that your investment is used to purchase securities issued by Investec Bank plc and which are designed to produce the stated returns on offer based on the performance of the FTSE. This means that Investec’s ability to meet their financial obligations becomes an important consideration. Fitch is one of main global credit rating agencies and Investec Bank plc has a credit rating of BBB with a stable outlook (awarded 27th October 2015).
The ‘BBB’ rating denotes a good credit quality and indicates that expectations of default risk are currently low, although adverse business or economic conditions are more likely to impact than a bank with a higher rating. 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, they have approximately 8,500 employees and provide a diverse range of financial products and services, specialising in a number of areas particularly within the banking sector. They are also a market leading provider of investment plans and structured deposits.
In addition to non-ISA investments, this investment has been one of our most popular with ISA investors and is available as a New ISA up to the current limit of £15,240 (2016/17 tax year), and also accepts transfers from both Cash ISAs and Stocks & Shares ISAs. Please check the plan details for any application or transfer deadlines that apply. The minimum investment is £3,000.
Fair Investment conclusion
Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “One of the main reasons investors consider kick out investments is that they can offer the potential for high growth and a full return of capital in as little as 12 months, even if the stock market stays relatively flat or only rises by a small amount. In both of these scenarios, this type of investment offers the potential to beat the market.”
He continued: “Investec’s plan is our most popular kick out investment, offering the potential to kick out at the end of each year and achieve 10.0% growth for each year invested. So depending on your view of what will happen to the FTSE in the coming years, the potential for double digit growth along with a full return of capital, could be considered a good return on your investment in the current climate.”
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 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 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.