Investment based on FTSE-100

bellybuttonfluffman · 17 January 2009 at 9:36AM

Hypothetical situation: If we were to be given the following investment opportunity by say one of the major high street banks:

- Minimum investment £20K.

- Maximum 5 year period.

- On each anniversary of opening the account, if the FTSE-100 index is...
a) less than it was on investment day, the original invested amount remains in the account for a further 12 months.
b) the same or has increased, the account earns (9 x numberOfYearsSinceOriginalInvestmentDate)% interest and may be closed.

- At the end of the five year period (and the account is still open)...
a) if the index is less than its level on investment day, the account is closed and the original amount returned to the investor.
b) if the index has stayed the same or has risen, 45% (5 x 9) interest is added and the account closed.

Do the more savvy MoneySavers here think this would be a good investment?

cloud_dog · 17 January 2009 at 10:38AM

Hopefully Dunstonh will be along in a minute with a more eloquent explnation but what I think you are describing is a guaranteed equity bond (????), which bascially guarantees your original investment, with somewhat limited returns.

If it is this type of product then these are generally thought not to be very good value although................. in this uncertain world they may have a space in a diverse portfolio.

Aegis · 17 January 2009 at 12:49PM

While guaranteed equity bonds are generally frowned upon, that's because the terms tend to be very poor and the total return can be completely ruined by a single bad year with no opportunity to exit the product.

However, this particular product actually looks half decent. It offers the opportunity to leave the product each year if the market recovers, and any time that does happen you get 9% simple interest at a time when 4.5% is about as good as you can get for a year.

Until recently I think Premier Asset Management had a product out like this offering around 13%, and it was considered to be very good for a certain kind of investor. Since then the FTSE and the central interest rates have dropped considerably and so the terms have changed to reflect that.

Worth a further look I think. It's not the product for me, but it could be good for someone else.

baby_boomer · 17 January 2009 at 12:58PM

Who can close the account after one year if the index is up, you or the investment company?

If the index is 1% down after 5 years you could lose out on dividends worth perhaps 25% of your investment.

And if the index is up 20%+ over 5 years you are also going to lose out. [You'll lose out if it is up 11% assuming the 45% interest is taxable and you are a base rate taxpayer. Stock market gains on £20K will probably be capital gain tax free and the reinvested dividends will also be tax free for a basic rate taxpayer.]

So it might be worth it if the index rises between 0% and 11%!

But then have to cash in at the end of the period - which might be the wrong time. You've lost flexibility.

Avoid these complicated instruments. It's the investor who has to pay for the complexities. [You're paying for the guy who thought up the scheme, the operation of the scheme and the commission to your high street bank for selling the scheme.]

Aegis · 17 January 2009 at 1:12PM

baby_boomer wrote: »

Who can close the account after one year if the index is up, you or the investment company?

I'd assume that it's automatic, I believe those were the terms of the one I've seen before.

If the index is 1% down after 5 years you could lose out on dividends worth perhaps 25% of your investment.

Depends how many of the FTSE companies are actually paying dividends at the moment. Many of the banks probably won't be, and I would be surprised if at this time we didn't see some dividend cuts in the FTSE.

With that said, it's certainly something to consider. You're effectively trading the potential growth and income of a tracker for a fixed annual return and a capital guarantee, so it comes down to personal preference as to whether it's worth it.

As I said, not for me, but for those with a cautious attitude to risk but a desire to gain something from the stockmarket it might be worth a look.

And if the index is up 20%+ over 5 years you are also going to lose out. [You'll lose out if it is up 11% assuming the 45% interest is taxable and you are a base rate taxpayer. Stock market gains on £20K will probably be capital gain tax free and the reinvested dividends will also be tax free for a basic rate taxpayer.]

Remember that the FTSE would have to gain that 20% in a single final year for you to be locked in to the product for 5 years and to see 20% growth that you miss out on. If the FTSE rises above its starting rate even by 1% in an earlier year it will trigger the payment of the 9%, 18%, etc.

20% growth in a single year for the FTSE would be quite unexpected at this stage I would think.

So it might be worth it if the index rises between 0% and 11%!

But then have to cash in at the end of the period - which might be the wrong time. You've lost flexibility.

You lose flexibility, yes. But you gain a guarantee.

Like I said, it's not for me, but for some more cautious investors this might be something to consider.

dunstonh · 17 January 2009 at 2:44PM

This seems to have a similar basis to the Premier bond that was popular last year. Although the 9% figure is much lower.

GEBs are largely rubbish. They are designed to be sold to low knowledge consumers by low skilled advisers. The sound bits of "guarantee" and investing in the stockmarket without the risk tend to attract people that wouldnt normally consider investing. Thats why the banks and the post office like them so much.

That said, every now and then a good one comes along. Usually from the institutional providers. So, you cannot totally disregard the sector. Just be on guard.

Mikeyorks · 29 January 2009 at 12:36AM

Noticed (why don't they write current customers?), too late, that Premier were offering 12.25% on a kick-out GEB (PLE41) that closed 23/1/09.

Down a bit on the 16% of a year ago - but still a little gem when compared to current rates? And with the FTSE in lowly territory there's little downside risk on the 50% drop that could curtail payout if it runs the whole 6 years. And every chance it will mature on the first anniversary (12.25%) or the 2nd (24.5%). And with profit under CGT ..... I do wish they'd written!

But not the OP scenario .... as the minimum remained £5k.

sabretoothtigger · 29 January 2009 at 1:28AM

I saw egg offering one of these and it didnt seem better then drip feeding a tracker.

I wouldnt go with the egg one or similar that i've seen but probably would with the sounds of this premier one especially if it turns out short term only.

Can someone give a link maybe for future reference

Heres a previous thread
http://forums.moneysavingexpert.com/showthread.html?t=798559

dunstonh wrote: »

Prefer the premier version as it will kick you out at any point in the 6 years if the FTSE100 is up on annual renewal date. If it does go the distance and then only sees an increase in the final year then it pays out 96% (or 80% after year 5) compared to Egg at 45%

50% drop over 6 years in the market would still return original capital? not that this is likely. Heres a relevant chart for you:

Mikeyorks · 29 January 2009 at 1:02PM

The original thread on the Premier one is here :-

http://forums.moneysavingexpert.com/showthread.html?t=719557&highlight=ple37

The 50% downside risk (not activated in the turmoil of the last few months) is covered by quote (T&Cs not viewable on the Premier site - as far as I can see - only there for the duration of each offer) at post #123 (Page 7 ..... very final para covers it).

Far superior to the Egg offering? Anyone with a standard GEB maturing soon is likely to face the same problem ... that they will have had money tied for 5 years and are unlikely to attain any profit because of a backend dip. With the Premier one you need 6 consec years below par .. before you achieve zero growth.

Investment based on FTSE-100

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