Nationwide/L&G/stock market

castle96

A friend was convinced by NW to invest in a "stock market investment" with L&G. There is a guarantee to at least get his money back after 6 years (shortly) if the index falls, otherwise he gets the full stock market growth. "There is a guarantee of 12% after 6 years" (I keep trying to tell him this is = to 2% pa, not "12%"). (There was no guarantee with this things,, was there, other than t get your money back if the market fell. below your initial investment.
Anyone got one of these/know any more about them ?

bowlhead99

There are / were a whole variety of structured products that let you have a piece of the stock market growth but limit your downside with some sort of insurance so you "can't lose", or at least "aren't likely to lose bigtime".

Of course, you can lose if the £1120 you get back isn't able to buy as many loaves of bread or litres of petrol or bottles of beer or months of rent, in late 2014, as the £1000 did when you first invested in late 2008.

You are right they are not going to guarantee a 12% return per year as their bare minimum return, because that would compare with the 3-4% per year he could have got by putting money in an interest-bearing bank account, and would be a ridiculous high return for zero risk.

However, there might well be a guarantee level of 12% total i.e. £1 becomes £1.12. If they do pay out the £1.12, it represents about a 1.9% annual return (i.e. a savings account that paid 1.9% and let you reinvest the interest every year, would compound up to 12% after 6 years). That was quite a low and affordable guarantee to offer at the time (interest rates were generally higher then).

Of course, there may be some small print that sets out a reason why this 12% is a target rather than a guarantee and they may be able to avoid even having to pay out the 12% if certain events occurred during the life of the investment. For example, a massive dip in the stock market somewhere along the way which exceeded the level of insurance they bought to use as a guarantee. But whether or not there is a guarantee and under what conditions it paid out, would be in the documentation.

You seem confused about what the 'friend' has. The details will be in the scheme document they published at the time. It is completely possible that they guaranteed some low level of interest (i.e. the 1.9% turning into 12%) which was much lower than the banks were paying out for savings accounts at the time. So you can't say "there is a guarantee of 12%" and then say "there was no guarantee with this things was there". That is two separate contradictory statements. Products with a minimum return of nil would have been available from some providers and products with a minimum return of 12% total could have been available from other providers. Also, stock market linked products with a minimum return of nil might have had a maximum return of 12% per year. A product can be structured to give you all kinds of potential outcomes.

If there wasn't a guarantee of any kind, it wouldn't have been a very attractive product, would it? So I expect there is one. Whether it is 12% or zero %, the documentation that came with the investment will say. If he doesn't have the documentation, he could ask the provider, or simply wait and see what happens when it matures shortly.

You mention he gets his money back if the index falls and and then separately mention he might get a guaranteed minimum small positive return if the index falls. We don't know which one of those he will get because we don't have the L&G product document. But what we can probably say with certainty is that if the index rises he won't get the whole of the stock market growth, he will just get something related to the change in the index value.

If the product is structured to give some security against downside risk, and also presumably the product provider makes some management fee out of it, then they can't possibly afford to give the whole of the stock market growth, because putting in place the guarantees will have cost them some money. So what it might do is give the whole of the capital index growth (e.g. the capital value of the FTSE index rising from 5000 to 6900 is almost 40%) but not also the dividends that would have been received of about 3% every year.

In other words, the proper total return (growth) of the stock market would assume dividends are reinvested. But the growth they usually use for these calculations is typically just the simple change in the index.

The way to work out what he has and whether it is a good deal is to read the scheme docs. I am curious why you are asking on your friends behalf, it sounds like you are trying to tell him what a good or bad move he has made ("I keep trying to tell him..."..., "there was no guarantee was there"...). Are you just a jealous pal or simply someone curious and trying to help him decide how to reinvest the proceeds? He could always come on here himself and tell us what he bought and what the terms of it actually say.