Beware the Barclays FTSE Capital Protected Plan and other similar

TBeckett100

There are a spate of products in the market, Barclays included that offer your capital back after 5 years, plus 110% or whatever growth in the FTSE.

If we think back over the past few years, the FTSE has grown enormously. However, what you must be wary of is the "averaging".

As an IFA, a client told me that he was nearly talked into the above product by his bank manager. I said I would research it which I did. The following is my except to him, which I think you may find interesting.

‘Guaranteed’ Products

Since the stockmarket falls in 2000 and 2001 there has been an emphasis in the market on ‘guaranteed products’. Generally these products involve investing a sum of money for x years with the guarantee of your money back after a defined term.

You cannot usually take ‘income’ withdrawals from these types of plans and you are not guaranteed a full return of your investment should you need to surrender them during the term.

The Barclays Five Year Protected FTSE Plan offers a full return of your investment after 5 years plus 112% of the rise in the FTSE 100 Index. This appears an attractive option to investors seeking a secure investment.

There is also an early maturity option which is payable on 16 March 2009. The plan will only mature if the FTSE 100 Index is 20% or more above the Initial Index Level. If the FTSE 100 has indeed grown by 20% under the definition of the plan, you will receive your original investment, plus a further 20% of your original investment.

If the market grew more than 20%, you will only receive 20% and Barclays will retain the balance. Subsequently if the FTSE did not achieve the defined 20%, the plan would continue until maturity.

Our initial thought of this type of plan is to always study the small print. The 112% return of the FTSE 100 is not as straight forward and generous as it may appear.

In the final year of the plan, the level of the FTSE 100 is recorded on the same day each month. At maturity we understand that an average is taken for the final year which then represents the final FTSE level (by definition of the plan).

To put this into context the following is a rough approximation of the returns had you invested £100,000 into a similar plan 5 years ago.

Assumption
£100,000 invested on 01/08/2001

FTSE 100 Level on 01/08/2001 = 5550 (approx)

FTSE 100 Level on 01/08/2006 = 6000 (approx)

FTSE 100 Level Rise = 450 points or 9.9%

The following graph plots the FTSE 100 over the past 5 years.
Whilst (for the purposes of this example) the FTSE is at 6000 at the end of 5 years, we should take into account the averaging calculation used by Barclays in the final year to determine the average closing level for the purposes of this type of plan:

The chart below plots an approximate FTSE 100 level for each month in the final year.

FTSE 100 Calculation Point FTSE 100 Level
01/08/2005 5275
01/09/2005 5250
01/10/2005 5500
01/11/2005 5200
01/12/2005 5450
01/01/2006 5525
01/02/2006 5650
01/03/2006 5800
01/04/2006 5950
01/05/2006 6050
01/06/2006 5550
01/07/2006 5650
Average 5571
*Source: Interactive Investments

As you can see, an average FTSE 100 level for the final year is 5571. This means that under the definitions of this type of plan, the gain in the FTSE has been between 5550 (Aug 01) and 5571 (Aug 06 – averaged) just 21 points and not 450 points.

21 points is a return of 0.37% on the original FTSE Level of 5550 in August 2001. Under the terms of the plan you would receive back your original £100,000 plus 112% of the gain = £414.40.

Although capital is guaranteed, a £414.40 return on a £100,000 investment over 5 years would not be considered an attractive investment option, bearing in mind that the charges associated with this product can be up to 6% initially and during the period your money is locked away, inflation is effectively eating into capital.

On balance, the following chart demonstrates how a ‘stocks and shares’ based fund has performed over the past 5 years.
The Invesco Perpetual Income Fund has returned 94% in the past 5 years. In this instance, an equity based investment would have yielded far greater returns (though we would never place all your capital in one fund). Furthermore, in the past 5 years the FTSE 100 has not risen by as much as 94% and any growth in funds is attributable not only to the stockmarket but also the management team of the fund management groups.

Note

The example provided is based upon the past 5 years and future performance is not guaranteed. This example is to highlight how the actual return of the Barclays product is calculated and to compare the return against an alternative investment product.

Information regarding the Barclays product was sourced from Barclays.co.uk.

dunstonh

http://forums.moneysavingexpert.com/showthread.html?p=2728519#post2728519

Its a subject that often gets covered on here. However, your post makes a nice detailed addition.

Market_Oracle

TBeckett100 wrote:

Assumption
£100,000 invested on 01/08/2001

FTSE 100 Level on 01/08/2001 = 5550 (approx)

FTSE 100 Level on 01/08/2006 = 6000 (approx)

FTSE 100 Level Rise = 725 points or 9.9%

Its 450 NOT 725.

So what if the stock market was 5000 on 1/8/06 ?

Thats a 550 point LOSS ! or 10%.

I'm not promoting GEBS, since I think people should take the step of educating themselves and building their own portfolio of stocks and funds. Just the facts are not as clear cut

whambamboo

TBeckett100 wrote:

There are a spate of products in the market, Barclays included that offer your capital back after 5 years, plus 110% or whatever growth in the FTSE.

If we think back over the past few years, the FTSE has grown enormously. However, what you must be wary of is the "averaging".

As an IFA, a client told me that he was nearly talked into the above product by his bank manager. I said I would research it which I did. The following is my except to him, which I think you may find interesting.

‘Guaranteed’ Products

Since the stockmarket falls in 2000 and 2001 there has been an emphasis in the market on ‘guaranteed products’. Generally these products involve investing a sum of money for x years with the guarantee of your money back after a defined term.

You cannot usually take ‘income’ withdrawals from these types of plans and you are not guaranteed a full return of your investment should you need to surrender them during the term.

The Barclays Five Year Protected FTSE Plan offers a full return of your investment after 5 years plus 112% of the rise in the FTSE 100 Index. This appears an attractive option to investors seeking a secure investment.

There is also an early maturity option which is payable on 16 March 2009. The plan will only mature if the FTSE 100 Index is 20% or more above the Initial Index Level. If the FTSE 100 has indeed grown by 20% under the definition of the plan, you will receive your original investment, plus a further 20% of your original investment.

If the market grew more than 20%, you will only receive 20% and Barclays will retain the balance. Subsequently if the FTSE did not achieve the defined 20%, the plan would continue until maturity.

Our initial thought of this type of plan is to always study the small print. The 112% return of the FTSE 100 is not as straight forward and generous as it may appear.

In the final year of the plan, the level of the FTSE 100 is recorded on the same day each month. At maturity we understand that an average is taken for the final year which then represents the final FTSE level (by definition of the plan).

To put this into context the following is a rough approximation of the returns had you invested £100,000 into a similar plan 5 years ago.

Assumption
£100,000 invested on 01/08/2001

FTSE 100 Level on 01/08/2001 = 5550 (approx)

FTSE 100 Level on 01/08/2006 = 6000 (approx)

FTSE 100 Level Rise = 725 points or 9.9%

The following graph plots the FTSE 100 over the past 5 years.
Whilst (for the purposes of this example) the FTSE is at 6000 at the end of 5 years, we should take into account the averaging calculation used by Barclays in the final year to determine the average closing level for the purposes of this type of plan:

The chart below plots an approximate FTSE 100 level for each month in the final year.

FTSE 100 Calculation Point FTSE 100 Level
01/08/2005 5275
01/09/2005 5250
01/10/2005 5500
01/11/2005 5200
01/12/2005 5450
01/01/2006 5525
01/02/2006 5650
01/03/2006 5800
01/04/2006 5950
01/05/2006 6050
01/06/2006 5550
01/07/2006 5650
Average 5571
*Source: Interactive Investments

As you can see, an average FTSE 100 level for the final year is 5571. This means that under the definitions of this type of plan, the gain in the FTSE has been between 5550 (Aug 01) and 5571 (Aug 06 – averaged) just 21 points and not 450 points.

21 points is a return of 0.37% on the original FTSE Level of 5550 in August 2001. Under the terms of the plan you would receive back your original £100,000 plus 112% of the gain = £414.40.

Although capital is guaranteed, a £414.40 return on a £100,000 investment over 5 years would not be considered an attractive investment option, bearing in mind that the charges associated with this product can be up to 6% initially and during the period your money is locked away, inflation is effectively eating into capital.

On balance, the following chart demonstrates how a ‘stocks and shares’ based fund has performed over the past 5 years.
The Invesco Perpetual Income Fund has returned 94% in the past 5 years. In this instance, an equity based investment would have yielded far greater returns (though we would never place all your capital in one fund). Furthermore, in the past 5 years the FTSE 100 has not risen by as much as 94% and any growth in funds is attributable not only to the stockmarket but also the management team of the fund management groups.

Note

The example provided is based upon the past 5 years and future performance is not guaranteed. This example is to highlight how the actual return of the Barclays product is calculated and to compare the return against an alternative investment product.

Information regarding the Barclays product was sourced from Barclays.co.uk.

The averaging is of course bad, and the dividend theft is worse, but your example is misleading to your client, as you choose only one example for a particular set of months. Had the fund ended on 1/6/06, you'd have been better off with the averaged value (possibly - I don't have the data for the previous two months - but certainly it's very possible that the investment would have ended up very much lower than 6,000), as you chose a very good month to end on. In reality nobody can time the market.

I think your example is not being entirely honest to your client, because you're using very specific figures, implying that the product would always behave like this. This is not the case.

It of course correct that the averaging reduces return, but it does not do it as dramatically as this.

You have no way of predicting future performance, but let's say there is 6% average annual growth. There will be fluctuation form month to month, but the direction and nature of this is unpredictable. So at the start of the year it's at 1000, and and the end it's at 1060. So the average growth over the year is obviously circa 3% (2.97% to be exact, based on 1.06 ^ 1/12).

So effectively you get 4 years of full growth, and the fifth year you only get half the growth of the market.

So with a 6% annual return, you get: (1.06 ^ 4 * 1.0297 -1) * 1.1 + 1 = 33.00% growth.

Interestingly if you just got the final value (with no averaging), you would get 1.06^5 = 33.82% growth

By the way the return is 110% (of the growth, not the final value, sneaky trick :-)) not 112%.

So the final year averaging is a marketing trick, which effectively steals half your return of that final year, and at 6% projected growth a final year averaging product is very slightly worse than a simple tracker which simply returns your initial stake * the growth in the market (i.e. 100% of the growth rather than 110%). But basically the averaging in and of itself is not that bad - while you do lose half your last year's return, it is offset by the 110% return. But he higher the average return, the worse averaging will turn out to be for you.

So contrary to your argument, *on average* (because you chose a good month, you could equally find the bond maturing in a bad month), treating growth as continuous (which it is not, but it is statistically ok to do this), averaging simply costs half the expected return for the averaging period. There is no sense in looking at single specific examples to illustrate this. The averaging is good for the investor in that it reduces risk. Reduction of risk is always paid for in return, and if you are offered

100% of the return of the market on the last day
OR
110% of the return of the market averaged over 12 months

then the latter is probably better due to lower volatility - the investor whose bond matured the week after a catastrophic crash would only pay 1/12 of the cost of that crash.

Now this comparison dosn't really represent the marketing reality: the investor is intended to see the 110% as something this makes this rather crappy product better than its competitors, rather than as compensation for the averaging (which the naive investor is unlikely to be told by his bank manager will cost him on average half his last year's return), but in essence this product is comparable to a 100% GEB with no averaging, but is lower risk, so is better than such a product.
Now where this investment costs you is in the lack of dividends. We've already established that the product in effect returns roughly 100% of the return of the FTSE (less than 100% if the average annual return is > 6%, more if it is less than 6%), so compared to a low-cost FTSE tracker, typically costing 0.5% PA, you are paying 3% PA (which I believe is the average yield of the FTSE 100).

You are therefore paying an extra 2.5% PA to buy a stop-loss on the FTSE. Whether this is a good investment depends on the volatility of the market.

If we take the average growth as 6%, and yield as 3%, then you compare:

8.5% (capital + dividends - costs) on low-ost tracker
vs.
6% (capital-only) on this product

then after 5 years the expected return is:
50.37% for the low-cost tracker
versus
33.82% for the GEB

but then the return has a non-zero variance, and while the tracker can lose money, the GEB cannot. So the expected return on the GEB is actually higher than 33.82%, where as the expected return on the low-cost tracker is exactly 50.37%.

So if you plot the return of the GEB as a curve, and assuming it is normally distributed (note I have no idea if this is valid, and I don't have any background in this), then you would expect to see a bell curve symmetrical about 33.82%.

Some part of this curve will fall below 0%, and essentially it is the area of that curve that is added to the 33.82% to get the expected return.

So for instance, if the standard deviation is 30% return, then using 0.01 standard-deviation-sized intervals in an Excel worksheet, the amount that losing issues take off the return (i.e. where the index after 5 years is below the starting value) is -1.77%. You never pay this in the GEB, so you add that to the return (note how tiny this number is).

So therefore with a standard deviation of 30, the expected return is 33.82 + 1.77% = 35.59%.

You are therefore paying 16.78%, or 1.76% PA to exclude the risk of losing. This is very high. Obviously insurance has a cost - if you buy home insurance, the insurer is selling it to you on the basis that if you pay £300, he expects an average of say £200 in claims: the reason for you to do it is even though insurance should always cost more than the average benefit you gain from it, your aversion to risk makes the risk premium good value.

I have not considered the initial 6% entry cost (3% of which is kicked back as commission to the adviser), cf. perhaps 1% on a dividend-paying product, which only make it worse.

But it is interesting that even with relatively high standard deviation, very little of the return falls below zero, so the bank's risk is small.

We do not know exactly what the standard deviation of the FTSE is, nor have I established that it does indeed follow a normal distribution, but my numbers would mean:

1. on average you get 6% PA, or 33.82% over 5 years
2. 68% of values are within one standard deviation of the mean - the index would return between 3.82% and 63.82% over 5 years 68% of the time, and 95% of the time within 2 standard deviations of the mean - between -27.82% and 93.82% over 5 years

Assuming a normal distribution, the standard deviation has to reach approximately 80% return.

This is clearly absurd.....

I have abused the statistics a bit here, but the evidence is clear:

1. GEBs are a waste of money, and the insurance against loss in capital is far too expensive for a product tracking a blue-chip, low volatility index.
2. Last-year averaging reduces risk at the cost of half the period's return, but it's not nearly as bad as the OP implies :-)

Absent the initial charge, I'm not sure that a GEB is worse than a normal bank account, as the stockmarket minus dividends has histoircally slightly outperformed the building society, but on the flip side this product ties up your capital for years and is inflexible - with normal investment you can enter/exit the market whenever you like. So with the 6% charge, the 5 year term, and the higher risk than the bank, this, and other such products, is a pile of poo.

I think one of these products would only become interesting with a low or zero initial charge, and a guarantee to return 150% of the return of the FTSE 100 (and no averaging or other tricks designed to con the consumer ;-)). I wouldn't invest even then, because the 5-year term annoys me, but at that point it would become a viable product.

Until then steer clear.

TBeckett100

at the time of writing the product offered was the 112% one and the figures were based on 5 years previous, certainly no date adjustment to bias the study.

the figures are irrelevant but the effect of averging is the message to get across.

whambamboo

I spotted another problem with this garbage product.

Apart from the fact that their so-called early investment discount is nothing of the kind (it's actually just interest on your money).

The 20% Potential Early Maturity Option is pushed several times in their brochure (http://www.business.barclays.co.uk/BRC1/jsp/brcucontrol?task=file&site=bbb&fileName=/BBB/A/Content/Files/5yr_Prot_FTSE_Plan_Premier_brochure_FINAL.pdf):

However, you can elect to have the performance of the FTSE® 100 Index reviewed after two-and-a-half years and if
the level of the FTSE® 100 Index on the 15 July 2009 is 20% or more above the Initial Index Level (the Performance Condition), the Plan will mature early and you will receive:
• Your money back
Plus
• A return equal to 20% of your original investment.

What they fail to mention:

you paid 6% to get in in the first place, but you're cashing out after 2.5 years, massively increasing Barclay's profit margin.

and worst of all, if the market goes up more than 20%, you still only get 20%!!!!

So you are depressing your average return due to the 6% initial charge only spreading over 2.5 years, and then again because the return is capped at 20% (without it being stated in the prospectus that the effect of this is to REDUCE your expected return - naive investors would miss the point - indeed in another thread, RichGirl says this is a POSITIVE about this product, so it shows that Barclays marketing is effective in its itent - to rip people off).

In fact this option is abysmal - it means that if the return is over 20%, you are WORSE OFF, because they seize the difference.

Just imagine the scenario:

Mr Brown goes to see a Financial Adviser with £100,000 and says he is risk-adverse.

FA: "Ah yes, Barclays have just the product. And if you're worried about locking in your gains, you can cash out ahead after 2.5 years if the market has gone up by 20% or more!"

A few weeks later, the FA is £3k richer, Barclays are £3k richer, and Mr. Brown, £6k poorer, has £94k invested in this crappy product.

The FTSE soars, increasing by 100% after 2.5 years.

Mr Brown checks his Daily Mail, and sees the FTSE is up 100%. He is very pleased, thinking he will have made £100,000 profit. The stockmarket is great he says!

He calls his FA and asks when the cheque will be arriving.

"Soon"

Next day on the door mat, a cheque for £112,800.

Mr. Brown is very disappointed when his more mathematically inclined son points out that he has received only 4.9% AER on his original investment, and would have made more money leaving his money in the high-interest savings account the FA advised him to move it from. He is even more angry when he wonders what happened to the £100k profit + dividends that he would have made investing directly in the stock market

Mr. Brown vows never to invest in any financial product again and takes his cheque for £112,800 and goes out to buy a buy-to-let flat.

--

Is it any wonder with dreadful products like this that people have no confidence in banks? The Early Maturity Option is a complete con, and Barclays should be ashamed of themselves for exploiting naive consumers and attempting to rip them off without explaining the consequences - there's only one conclusion from this product: Barclays intend to con the unwary and the vulnerable.

GEBs are the endowments of the noughties, rubbish, and with plenty of hidden tricks designed to rip off the consumer and enrich the bank + adviser.

It makes me feel much better about getting a free £100 for opening an account with them (since closed) a few months back :-).

whambamboo

TBeckett100 wrote:

at the time of writing the product offered was the 112% one and the figures were based on 5 years previous, certainly no date adjustment to bias the study.

regardless of intent, the effect is biased.

It's a fairly intuitive concept to describe without resort to examples:

If you have £0 in your bank at the start of the year, and £6 at the end, then the average balance is clearly £3 - half the difference. So it should be enough to just to say that by averaging over a year, you lose half the last year's return.

You imply that you can lose *all* your return by averaging (but so could the opposite). This could happen, but on average the effect is simply half the last year's return.

dunstonh

GEBs are the endowments of the noughties, rubbish, and with plenty of hidden tricks designed to rip off the consumer and enrich the bank + adviser.

The noobie adviser you mean. You have enough advisers here confirming how rubbish they are to show that as long as your adviser is switched on with investments, they wont recommend it.

If an adviser recommends one, tell them to get back to mortgages and leave investment advice to proper investment advisers. (Thats not a dig at mortgage advisers but recent reports have suggested that a signifcant proportion of financial advisers spend a minority of their time on investments and deal mostly in mortgages).

whambamboo

dunstonh wrote:

The noobie adviser you mean. You have enough advisers here confirming how rubbish they are to show that as long as your adviser is switched on with investments, they wont recommend it.

Yes indeed, but the general public can't tell the difference.

I'm not sure that the general public trusts financial advisers as a collective body

The only financial adviser I ever dealt with was my ex-Landlord, whom I sued. I wasn't impressed with him - he seemed pretty thick to me. What exams do IFAs have to take? Are they optional?

I certainly wouldn't have wanted him looking after my money, as he was clearly less capable of doing so than me.

TBeckett100

There are set exams which are compulsory before one can be authorised. The exams regime is changing and is a lot more specialised. I wouldnt say IFAs are bad at all, there is a lot more regulation these days and certainly the team I work with are exceptional in their knowledge, i think it pays to "shop around".

TBeckett100

whambamboo wrote:

regardless of intent, the effect is biased.

It's a fairly intuitive concept to describe without resort to examples:

If you have £0 in your bank at the start of the year, and £6 at the end, then the average balance is clearly £3 - half the difference. So it should be enough to just to say that by averaging over a year, you lose half the last year's return.

You imply that you can lose *all* your return by averaging (but so could the opposite). This could happen, but on average the effect is simply half the last year's return.

I come from a school of thought that states a client will complain if they lose money but wont if they dont. Therefore if i state the downsides, the risks are known.