L&G Growth Investment Plan Plus 4

schiff · 19 August 2006 at 10:56AM

Has anybody looked at this, due to be launched 8 September? It has some interesting ideas built into it - the only thing I don't like about it so far is the 6% 'launch cost', though the annual charge following that is a reasonable 'up to a maximum of 0.5% each year'.

I imagine the 6% charge might be reduced by going via the 'right firm or individual'!

This is really targeted at dunstonh and his professional/knowledgeable colleagues on here!

schiff

cheerfulcat · 19 August 2006 at 12:15PM

Hi, schiff,

This is another of those horrible Guaranteed Equity Bonds. I wouldn't touch it with a bargepole. Have a look at this thread, where dh has linked to the various posts here about GEBs.

dunstonh · 19 August 2006 at 1:43PM

I think you probably know what my response is going to be.

Here are the L&G key points:

100% of any capital growth in the FTSE 100 Index at the end of six years
Capital protection at maturity
Early Payment Feature – the investment may close after three, four or five years if certain conditions are met
If the investment closes early, you will receive a set return instead
Capital protection at maturity
Available as a tax free ISA in 2006/7 tax year
Unlimited PEP and ISA transfer opportunities
Direct share option
Offer closes 8 September 2006

This sub-fund of Legal & General Protected Investments plc
will incur a launch cost of 6% with ongoing expenses up to
a maximum of 0.5% each year. However, these costs have
already been taken into account in calculating the potential
returns described within this brochure.

So, L&G take 6% upfront and 0.5% over 6 years is 3% (ignoring compounding). So, straight away they make 9% plus they arent paying any dividends so thats another 3% a year.

The FTSE100 is a offers limited potential and has been the worst UK sector for a long time now. It could change but unlikely considering its weighting.

Guaranteed equity bonds are cash cows to the providers. They package them with easy speak and some good sound bites which makes them easy to sell using low skilled sales reps at banks and building societies. Even the Govt has got in on the act and offers them through the post office.

However, once you strip down what they are offering, you realise that they are basically a waste of money.

Lets compare it with a unit trust investing in a UK Equity Income Fund.

If you invested £5000 in one of these in 2000 and it was maturing now (indeed you can say the same for the previous 4 years as well), then you would be getting back exactly what you paid in as the index is lower than what it started at. If you invested in a FTSE100 tracker then your £5000 would now be £4803.

If you invested in invesco perpetual income fund (picked as the UKs top selling equity income fund - so based on probability of being in this one rather than on picking it because its been the best) then £5000 would now be £10,732.

A FTSE tracker would be risk rated around 7 out of 10. An Equity Income fund would be rated 6/7 out of 10. An Equity income and bond fund would be risk rated around 5 out 10. The GEB is risk rated around 4/5 out of 10.

Whilst no capital guarantee was offered on the unit trusts and that may put some off, it should be noted that the equity income fund's worst 12 month performance was in July 2001-July 2002 when it lost 2.31% over that year. So, in the worst stockmarket crash in recent times, your £5000 would have dropped to £4708 in that period and within 3 months of that it would have been at £5811.

If capital security is still a concern for you then look at the following and build your own GEB:

Your £5000 is now split in two. Put £2500 in a cash ISA at 5%. Over 6 years that gives you £3350. Put the other £2500 into a UK Equity Income fund (or equity income and bond fund if you want even less risk or even a property fund if you want less still). Now you can afford to lose £850 on the unit trust which is a 34% loss. Plus if you get 6 years of income on that fund (reinvested) at 3% a year then you have a further 18%. Meaning you can lose 52% and still break even.

This way you get all the profit and not the provider.

schiff · 19 August 2006 at 11:57PM

Thanks a lot dunstonh - I knew I could rely on you and you've put an awful lot of work into it for me - thanks!

schiff :A

dunstonh · 11 September 2006 at 3:28PM

For reference on the 52% loss, that refers to the unit trust segment. So, if the unit trust over the 6 years dropped 52%, the interest on the other half and the dividends on the unit trust would offset it.

If you had invested in this manner 6 years ago (so had the crash in the middle) you would be looking at your £5000 being worth £3,350 for the half in cash ISA and £3730 for the half in the Equity Income fund. Giving you a total of £7080.

Had you invested in the same time frame in a Guranteed equity bond you would just be getting your £5000 back as the FTSE100 is lower than what it was 6 years ago.

This update was posted at the request of a forum member who PM'd me for clarification.

baldbloke_2 · 11 September 2006 at 8:38PM

Thank you dunstonh.

The clarity and detail of your replies has been very thought-provoking.

Excellent posts.

It works because the sum is relatively small. If the total investment was £50k then the ISA/Funds returns would presumably not be so rewarding in the event of a serious downturn in the market.

dunstonh · 11 September 2006 at 9:06PM

It works because the sum is relatively small. If the total investment was £50k then the ISA/Funds returns would presumably not be so rewarding in the event of a serious downturn in the market.

It would still work if it was 50k or 100k. However, with the "stockmarket" chunk you would diversify the funds as it isnt a good idea to pick one fund. Even with 5k I would pick a couple. 50k would see around 10, probably a few more to give a decent spread.

L&G Growth Investment Plan Plus 4

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