Capital Protected Bonds

Investment_Migraine

We have been recommended by a financial advisor to invest in a Capital Protected Bond. These are investments that work as follows: should the market drop we are guaranteed our lump sum back at the end of the term with no loss. But if the market is high then we get back our capital plus whatever the market has made, however this is capped at 22% which means if the market value is higher than 22% at the time, for example its up by 45%, we only 22% and the investment company gets the rest, over and above the 22% Its a cautious but guaranteed way of saving as you can't lose any money but obviously if the market is high we don't get full benefit. Does anyone have any experience of these kind of investments and what do you think?

We're stuck and don't know what to do, do we play it cautious or do we be a bit risky and invest in a riskier plan?

dunstonh

GEBs are largely frowned upon by here. IFAs are generally not keen on them either. A few gems pop up from time to time but most of them are pretty useless. Especially those sold by the banks and building societies.

The banks like them because they have some nice soundbites and include the word "guarantee". They are ideal for thier low skilled sales reps to sell to low knowledge customers.

Building your own GEB or looking at one with far better terms that that (as those terms you mention are awful) would be your best bet.

gozomark

how long is the term ?

if its 1 year, its attractive
if its 5 years it isn't

Investment_Migraine

It's a three year - does that make a difference?

swiss69

The key is who is providing the guarantee? It is usually a counterparty and often NOT the institution who are marketing the product. If the backer of the bond goes bust then you could be in trouble.

A GEB on offer last year was backed by Lehman Brothers...You know the rest.

Legal and General use 5 counterparties now to spread the risk as they also had some Lehman exposure on these type of plans last year.

Always read the smallprint to ensure that the fund really is guaranteed in ALL circumstances.

Aegis

Investment_Migraine wrote: »

It's a three year - does that make a difference?

Makes it sound better than some products, but still not great because there's no multiplying participation rate and the cap on the growth is really depressingly low. Not to mention the fact that it "tracks" the market but ignores the dividend payments that you would normally get, meaning you miss out on that as well as any excess growth.

All in all, not a great product from my perspective.

thelawnet

Aegis wrote: »

Makes it sound better than some products, but still not great because there's no multiplying participation rate and the cap on the growth is really depressingly low. Not to mention the fact that it "tracks" the market but ignores the dividend payments that you would normally get, meaning you miss out on that as well as any excess growth.

All in all, not a great product from my perspective.

It sounds rubbish to me. 22% is only 6.85% annualised, and that's not guaranteed - it's a cap. Premier Asset Management were offering an annual 16% return, even if the FTSE only rose by 0.1%

luvpump

swiss69 wrote: »

The key is who is providing the guarantee? It is usually a counterparty and often NOT the institution who are marketing the product. If the backer of the bond goes bust then you could be in trouble.

A GEB on offer last year was backed by Lehman Brothers...You know the rest.

Legal and General use 5 counterparties now to spread the risk as they also had some Lehman exposure on these type of plans last year.

Always read the smallprint to ensure that the fund really is guaranteed in ALL circumstances.

Dont the FSA rules apply to these kind of investments ?? I.e the 50k limit as in savings ?? I have no idea, but any curious about this type of investment ..

Aegis

thelawnet wrote: »

It sounds rubbish to me. 22% is only 6.85% annualised, and that's not guaranteed - it's a cap. Premier Asset Management were offering an annual 16% return, even if the FTSE only rose by 0.1%

And that was per year too, just to make other offers look even worse!

dunstonh

luvpump wrote: »

Dont the FSA rules apply to these kind of investments ?? I.e the 50k limit as in savings ?? I have no idea, but any curious about this type of investment ..

If unwrapped or in ISA it gets FSCS protection at 100% of first £30k and 90% of next 20k. If held in pension (not SIPP) or investment bond wrapper its 100% of first £2000 and 90% of rest with no upper limit.

The protection applies to the company underwriting the plan not the retailer. If the underwriter is not regulated by the FSA then there is no protection. This is why the ones underwritten by Lehmanns US are not getting an FSCS payout.

Investment_Migraine

Thanks for everyone's advice. So what kind of investment do you recommend, given the current climate of the markets etc. Is it the best time to invest now or continue to wait. We are happy to tie money up for 3-5 years but only if we get a decent return on the money