Since there will always be investors who are not confident the markets will rise over the medium term, there will always be the potential for defensive investments to appeal – and the range of plans on offer has certainly grown in recent years. A defensive investment plan is simply a plan that is designed to provide an investment return even if the stock market fails to rise, or in some circumstances goes down. This week we take a closer look at a new launch defensive plan that offers a 33.0% fixed return even if the FTSE has fallen up to 40%.
The FTSE highs and lows
Since the FTSE 100 Index (‘the FTSE’) broke through the 7,000 point barrier for the first time in March 2015, it has been as low as 5,537 points (February 2016), and has reached its highest closing level on record at 7,429 points (March 2017). Indeed, the FTSE has been well over 7,000 points since the start of the year and whilst the Index remains at what are historically high levels, defensive investment plans have become increasingly popular.
Defensive investment plans
This type of plan attempts to offer investors the best of both worlds, by balancing less of the investment upside, with the opportunity to achieve these returns even if the market fails to rise. 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 investment level returns.
The FTSE Defensive Growth Plan from Focus aims to provide a fixed return of 33% at the end of the six year term, and will do so provided the value of the FTSE at that point is at least 60% of its value at the start of the plan. Therefore, the FTSE can fall up to 40% and investors would still receive a 33% growth return, along with a full return of their original capital.
If the Index has fallen by more than 40% at the end of the term, no growth will be achieved and your initial capital will be reduced by 1% for each 1% fall. This plan therefore puts your capital at risk and you could lose some or all of your initial investment.
33% return even if the FTSE falls up to 40%
This is a strong headline since investors will receive a positive return, even if the FTSE falls by quite some way from its value at the start of the plan. This means that even if you are not confident the FTSE will rise at all, you could still receive a fixed return of 33% unless the FTSE falls by more than 40%. The 33% return is equivalent to 4.86% 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 40% and the fixed return of 33% is still paid. Whilst the FTSE continues at what are historically high levels, this ‘defensive’ feature could be an appealing one, whist the fixed return is also paid if the FTSE goes up.
Some capital protection from a falling market
Provided the FTSE 100 Index has not fallen by more than 40% at the end of the term, the 33% growth return is paid to you along with a full return of your initial investment. Since the market can fall up to 40% 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. Should the Index have fallen by more than 40%, your initial investment is reduced by 1% for each 1% fall. In this case you would lose at least 40% of your capital.
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.
ISAs and ISA transfers
The plan accepts ISA investments up to the maximum £20,000 ISA allowance as well as ISA transfers, from both Cash ISAs and Stocks & Shares ISAs. You can also make non-ISA investments and the minimum investment into the plan is £5,000.
Credit risk & compensation scheme
This plan is a structured investment so your initial capital is used to purchase securities issued by the plan’s counterparty, Credit Suisse AG. This means that Credit Suisse’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.
Standard & Poor’s is one of the main global credit rating agencies and as at 9th June 2015, Credit Suisse AG has an ‘A’ credit rating with a stable outlook. The ‘A’ rating denotes a strong capacity to meet its financial commitments and 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.
Credit Suisse AG profile
Credit Suisse AG is one of the world’s leading financial services providers and is a subsidiary of Credit Suisse Group AG. As an integrated bank, Credit Suisse Group AG offers a range of financial products and services across the areas of private banking, investment banking and asset management. Credit Suisse is headquartered in Zurich and as at the end of 2016, employs around 47,170 people and operates in 50 countries worldwide.
Fair Investment view
Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “Whist the FTSE continues at well over 7,000 points, if you are not confident that the markets will rise in the medium term it can be difficult to find investment ideas. Defensive plans such as these do offer an alternative, and with a product headline of a 33% growth return unless the FTSE 100 Index falls by more than 40%, the risk versus reward of this plan could make for a compelling opportunity. Of course this is dependent on you view of what might happen in the coming years, but if the FTSE had fallen up to 40% in 6 years time, and yet you still achieved 33% growth plus a return of your initial capital, some would consider that a good return on their investment.”
This plan is open for new ISA investments up to the £20,000 ISA allowance, Cash ISA and Stocks & Shares ISA transfers, as well as non-ISA investments, with a minimum investment of £5,000.
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 is 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 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.