130% of any rise in the FTSE?

ag359

I've seen a couple of products advertised (I think Virgin have one) that offer a return of 130% of any rise in the FTSE after x years, and 0% of any fall in the FTSE (i.e if the market drops, you get your original money back).

Now, I'm bright enough to realise that this can't be as good as it seems, but not bright enough to understand why - could anyone explain, preferably in fairly simple terms...

Thanks.

boltonangel

we offer a similar product where i work, details as follows.....

basically if you put your capital in (min £3k) we will guarantee that you will make at least 106.5% of your initial investment back and a max of 130%.

over the 3 years this equates to 2.16% per year as a minimum and 10% per year as a maximum. the rise and fall of the ftse 100 is calculated each quarter, and at the end of each year you will get back the average of that year, meaning that it is a safer investment than previous ftse 100 products.

you can also use your isa allowance for ours, so it is tax free. however you can also do it as a regular bond and pay your normal rate of tax at maturity. so if you are planning on becomming a non taxpayer in the next 3 years you will receive any growth tax free if you let them know.

like i say this relates only to the product at my work.
hope this helps. :A

greenwich

The big drawback is that you won't get any dividends.

In simple terms, if you just put your money direct into the stockmarket via shares or a normal fund, then you get dividends. If dividends are being paid at a rate of 4% a year (say) then over 5 years you'll earn 20% of the value of your investment just from the dividends. Products like the ones you've seen will keep the dividends for themselves. That's one reason why they can so 'generously' promise you 130% of the rise in the FTSE.

Products like these are for people who want some of the rewards of the stockmarket but can't accept the risk.

The other point is that if FTSE falls and you get your original investment back, then you've still lost the money you could have made just by putting it in the building society for 5 years.

whiteflag_3

Now, I'm bright enough to realise that this can't be as good as it seems, but not bright enough to understand why - could anyone explain, preferably in fairly simple terms...

Dont want this to sound like a cop out, but I dont think there is a straight simple answer to your question!

These products seem to good to be true because they are.


For a start its 130% of the growth in the index which means if the FTSE grows 20% over 5 years you only get A RETURN of 26%. !


The underlying structure of these products are usually effectively investment trusts ( registered in Dublin)which then use a number of financial instruments, like hedge funds to pay the returns over and above the index. The capital return is usually not guaranteed but paid for within the product and is usually underwritten by a major bank.

I could go on but hopefully you will see by what I have already written, unless you understand exacty how these things work you should , in my opinion walk away.

ps the fact that banks and building societies push them all the time should be the biggest reason to steer clear :

carnet

ag359 wrote:

I've seen a couple of products advertised (I think Virgin have one) that offer a return of 130% of any rise in the FTSE after x years, and 0% of any fall in the FTSE (i.e if the market drops, you get your original money back).

Now, I'm bright enough to realise that this can't be as good as it seems, but not bright enough to understand why - could anyone explain, preferably in fairly simple terms...

Thanks.

Pick some average to high yielding stocks and you could look forward to maybe 9-12% of the sum invested in dividends over the 3 years - which you won't get with any of these "guaranteed" schemes.

Also, what are the costs involved ? They usually charge quite heavily for the guarantees.

greenwich

whiteflag wrote:

These products seem to good to be true because they are. <snip> I could go on but hopefully you will see by what I have already written, unless you understand exacty how these things work you should , in my opinion walk away.

No one should confuse these products with the fraudulent schemes that are generally described with "if it's too good to be true then it probably isn't true". These products are not scams, they are prefectly genuine investments that do what they say on the tin.

It's far too sweeping to say that if you don't understand this, walk away. Would you advise someone not to get a fixed-rate mortgage unless they first understand how interest rate hedging on the money market works? Of course you wouldn't advise that. Same here: provided you understand what you're getting and not getting (as to which see my post above) there's nothing wrong in taking out something like this if it appeals to you.

whiteflag_3

No one should confuse these products with the fraudulent schemes that are generally described with "if it's too good to be true then it probably isn't true". These products are not scams, they are prefectly genuine investments that do what they say on the tin.

Sorry greenwich where did I say at any point that these were fraudulent schemes.

genuine investments that do what they say on the tin.

I dont disagree that that they do what they they say on the tin , but the poster highlights the way the products are sold in that it is the headline rate on the "tin" that grabbed the attention. No mention of the loss of dividends,high cost of the product, how the return of capital is provided for etc etc.

Heres another sweeping statement "these products are overpriced rip offs and i wouldnt touch them with someone elses barge pole let alone my own"

Mr_Mumble

Check Grumbler's post for links to previous discussion on GEBs (Guaranteed Equity Bonds) here:

http://forums.moneysavingexpert.com/showthread.html?t=99190

Info on the Virgin GEB here:

http://uk.virginmoney.com/geb/

A return on capital in five years (taking the example of Virgin), if the FTSE doesn't rise, would mean losing about 12.5% in real-terms, thanks to inflation and around 25% compared with sticking the money away in a high-interest cash ISA (assuming interest rates and inflation stay roughly the same in the next five years of course).

The main problem (maybe benefit for a few) with the Virgin GEB seems to be the automatic deduction of tax, it's treated like a savings account would be, and no mention of being able to put it into an ISA. Also, the total gain of the FTSE is averaged out during the final year (so an average of daily finishing prices from October 26th 2009 to October 25th 2010 will calculate the return from October 25th 2005).

Most GEBs issued by banks, building societies or NS&I do not have charges to guarantee the capital. GEBs issued by insurers and unit trusts often do, more details here:

http://www.fsa.gov.uk/consumer/11_Learn/financial_products/saving/b3.html

Virgin's GEB is issued via Abbey and the FAQ section states clearly there are no charges associated with the bond.

southcoast_2

What stocks are High Yielding??

dunstonh

The last GEB I sold was in 1996. Havent seen a good one since then. Some look attractive but when you look at them closely they are not. BTW, the last ones i did were income related. Capital returned if no drop on the FTSE100 with a quarterly income of 5% in year 1 increasing to 10% in the final year (a damned good return at the time for an income product). Now, if there happened to be a release of that again, I would potentially look at these products again. However, a 130% version does nothing for me.

These products are pushed mainly by banks and building societies. They are targetting the unsophisticated customer who wouldnt know a good deal from a bad and are easily sucked into these. After all, anyone going to the bank for advice clearly isnt looking for a good deal.

Tim_L

There's a good example of how these are sold to the unsophisticated in today's Sunday Telegraph money section where someone complains that a 6 year GEB bought in 1999 has returned only £50 or so - the buyer completely missed the point of the product and believed she was buying a 60% guaranteed return.