FTSE 100 tracker funds?

alex000

In the previous FT weekend money section they had a article on such matter.

‘Peace of mind’ product savaged
By Alice Ross
Published: October 31 2008 17:05 | Last updated: October 31 2008 17:05
Cautious investors are being targeted by banks and building societies offering them “peace of mind” in current market conditions – in the form of a guaranteed equity bond (Geb).

But financial advisers and industry experts warn that Gebs are, for the most part, not worth the paper they are written on.


A Geb is a form of structured product, offered by a bank or building society. It is usually marketed to investors as a way of guaranteeing capital with the potential for some stock market growth.

There are currently 26 providers of Gebs, according to Defaqto, including Birmingham Midshires, Abbey and Newcastle Building Society.

Nationwide, for example, is marketing a Geb that offers to return capital after 6 years plus 2.8 per cent AER. If the stock market rises, investors also earn a return equivalent to 70 per cent of that growth.

The company says it is a way for cautious investors to gain exposure to the stock market but with a level of security, as they will not lose money.

But financial advisers are vitriolic about the products.

“They are hideous,” says Andrew Wilson, head of investment at Towry Law. “They tend to be a very expensive way of getting not very much. They’re being marketed highly because the banks make money out of them.”

“Every product I’ve ever seen has ended up disappointing me,” says Mark Dampier at Hargreaves Lansdown.

“In most cases, guaranteed products work out no better than a cash return – and often worse.”

Advisers reel off a list of reasons to be wary of the products: they are invested in the stock market but do not pay dividends to investors; they limit the stock market growth available by paying less than 100 per cent of it; they involve high commission levels of up to 7 per cent or more; and they are usually taxed on maturity as income and not capital gains, so higher rate taxpayers will pay 40 per cent.

“Frankly you’d be better off sticking some money in cash and the rest directly into the stock market,” says Dampier.

The confusing nature of the products is also a problem. Royal London, for example, is quite honest about the fact that its product, Riley, launched as a competitor to Gebs two years ago, has not been successful. Financial advisers were wary both because of the complexity and the high cost of providing the guarantee, the company admits.

However, some advisers say they have made decent returns for their clients on Gebs in the past. And they may make sense for those who have an alternative view to the issuer on how stock markets will perform.

“The only way it is worthwhile is if you feel you have an information advantage over the provider and that they’ve assessed it wrong,” says Wilson. “I think that’s unlikely, but if you found one that absolutely met your needs then fair enough,” says Wilson.

He reckons National Savings & Investments (NS&I), which has no counterparty risk but puts all deposits with the Treasury, could be the best of a bad bunch.

Richard Saunders, chief executive of the Investment Management Association, distinguishes between structured securities such as those offered by Blue Sky and Meteor, and structured deposits – those offered by NS&I and banks and building societies.

He points out that the two have totally different regulatory structures – structured securities fall under European regulations, while structured deposits have “no product regulation whatsoever”. Worryingly for investors, this means issuers of the products are not bound by disclosure rules on charges, risks and where the product is invested.

Both types of structured product fall under the financial services compensation scheme, which guarantees £48,000 for structured securities and £50,000 for structured deposits.

A major problem with structured products, though, is that investors can lose money when the counterparty to the product fails, but find themselves still unable to claim compensation as the provider offering the product has not gone bust.

This was seen most recently with the failure of Lehman Brothers, which was counterparty to a number of structured products.

So this is one way in which Gebs have an advantage over structured products as, in some cases, the bank or building society offering the Geb is willing to cover the loss itself.

Nationwide, for example, offers its product through Legal & General, which uses Santander as a counterparty.  But if Santander were to fail, Nationwide says it would stand by its promise to investors to return capital.

However, this does not address the issue of performance. Saunders suggests that, even though the products may be marketed more heavily in the coming months, they will struggle to perform because of their reliance on both derivatives and high interest rates.

Providers will often buy discounted securities with a portion of the investor’s capital, in the hope that their value will grow over the term of the product, say five years. Such a strategy is more successful if the derivatives are cheap and interest rates are high.

“Both those are going in the wrong direction at the moment,” warns Saunders.

StevieJ

loaner wrote: »

That ignores the circumstances that would cause interest rates to go to 1%.

Low interest rates are what caused this problem in the first place, the MPC would be foolish to take them so low for a long period.

Yields are past yields, future yields are never guaranteed. If the ftse is booming, yields would go down.

Yes, but if he puts his money in now he will have have made nice capital gain. It is funny really, when the Ftse has most to offer i.e. bottom of a crash, the uber pessimists come out in force.

StevieJ

loaner wrote: »

Depends if this is the bottom, I suspect it will go significantly lower.

Also depends how many years you are prepared to wait for recovery, what type of tracker vehicle you use, what the charges are. Fixed term products are particularly risky.

OK, why is it going lower?

StevieJ

loaner wrote: »

because very few companies aren't affected by a downturn along with higher taxation. The economy has been running on never ending credit, that has now dried up.

The UK stock market has been down 45% from top to bottom, is that not punishment enough? Anyway the UK Ftse is not totally dependent on the UK economy from what I can remember 70% of income is generated abroad.

neilsedaka

Tinpusher wrote: »

Hi folks,

Any recommendations for a FTSE 100 tracker fund? I figure with the FTSE 100 at a bit of a low, I'm going to drop some savings into it. Like, about £3600 of unused ISA allowance for this year.

Looking for a 3-7 year investment here.

I have been investing new ISA money into Fidelity Moneybuilder UK FTSE All Share Index Accumulation Units via the Hargreaves Lansdown Vantage ISA wrapper from 9th to 28th October, a little at a time each day before 8am, sometimes £250 a day and sometimes £500 depending on what I think the index will be at noon. The aim is to buy at a good average low point, then hopefully wait for however long it takes for the units to rise significantly at which point I will move out of the Fidelity units into cash still within the Hargreaves Lansdown Vantage ISA.

StevieJ

neilsedaka wrote: »

I have been investing new ISA money into Fidelity Moneybuilder UK FTSE All Share Index Accumulation Units via the Hargreaves Lansdown Vantage ISA wrapper from 9th to 28th October, a little at a time each day before 8am, sometimes £250 a day and sometimes £500 depending on what I think the index will be at noon. The aim is to buy at a good average low point, then hopefully wait for however long it takes for the units to rise significantly at which point I will move out of the Fidelity units into cash still within the Hargreaves Lansdown Vantage ISA.

How much do H&L charge you for that, because they won't be getting their normal kickback of Fidelity?

neilsedaka

StevieJ wrote: »

How much do H&L charge you for that, because they won't be getting their normal kickback of Fidelity?

Zero initial charge, 0.10% annual charge which is nothing compared to the volatility of the value of the units.

StevieJ

neilsedaka wrote: »

Zero initial charge, 0.10% annual charge which is nothing compared to the volatility of the value of the units.

That is pretty good, I think Fidelity have the lowest tracker charges.

dunstonh

Zero initial charge, 0.10% annual charge which is nothing compared to the volatility of the value of the units.

No its not. HL charge an extra 0.5% plus VAT for holding that fund. Trackers are expensive on the HL platform.

Additional annual charge of 0.5% + VAT is applied to this fund when held in the Vantage ISA and SIPP. This additional charge is not accounted for in the Total Expense Ratio quoted above.

StevieJ

dunstonh wrote: »

No its not. HL charge an extra 0.5% plus VAT for holding that fund. Trackers are expensive on the HL platform.

Additional annual charge of 0.5% + VAT is applied to this fund when held in the Vantage ISA and SIPP. This additional charge is not accounted for in the Total Expense Ratio quoted above.

Cheers Dunstonh, that makes sense. It is not normally a good idea to go direct to providers for funds, trackers being a notable exception.