Guaranteed Equity Bonds [GEBs]

Milarky

... It's quite easy to understand how these 'work' - you invest a lump sum on the level FTSE 100 index on a given date and receive a proportion of any increase in the value of the upto 5 [or 6] years later.. with the added assurance that you will get back all your money if the level of the index is actually lower at maturity. There are several variations, but that is the basic design..

Now, what are the 'pros and cons'?

PROs:
- Capital protection
- Achieves most/any gain over a decent period of time

CONs:
- 'Capital protection' ignores loss of interest - so it is 'partial capital protection' really
- Fixed Term - usually 5 or 6 years - which is longer than average
- Lump Sum - cannot be added to either
- Questionmarks over 'entry' and 'exit' points - usually the level of the FTSE on a prescibed date on entry, and an average of the FTSE over a period of time at the exit point.

Now the point of this post is to invite suggestions at how the 'CONs' could be addressed or improved upon?

For instance, If I had £10,000 to invest, but didn't want to put in all in on one date, how far spaced are the dates that I could make the minimum investment [eg 10 x £1000] by instalments up to the same sum instead?

Are there restrictions about buying the same product from the same provider - that they may place on you? If invited once [eg Egg marketing] will you NOT be invited the next time this comes around if you take up on the first occasion?

Spaced entry points also imply spaced exit points... What can 'spacing' really achieve [averages out the entry level? - distributes 'capital protection' levels also] that helps take the 'guesswork' out of this type 'investment'?

What are the 'offer dates' in practice, and are they tied into significant market 'rallies' which ensure the 'entry' level is higher than the average - and so reduces the benefit of any eventual increase in the index?

Any thoughts?

paul666

CONS:
You don't get the dividend payments that a regular tracker or portfolio of shares would get. This should be con number one.

Milarky

This is equatable with the 'loss of interest' [mentioned above] included in tying up the capital for the period of the Bond, I suppose?

Of course you would normally expect to receive 'either' the interest 'or' the dividends [as you can't have the money in two forms at the same time]...

But I was wondering (in a sense) how 'liquid' the market in GEBs could be? If you could go down to the 'bank' and open one on any day of the year you would be able to take full advantage of 'market timing' [technically known as 'buying on the dips'] to maximize your possible returns. I suspect, therefore, that there must be some kind of 'rigged market' in GEBs whereby they are all brought out at the same times - to coincide with 'rallies'. The market is known to 'rally' on certain dates when options expire and 'shorters' have to 'close'. The last such 'witching' day was (I believe) on 17th September - and look how the market behaved in both the run up to and on that date. This was a rally which could be predicted from some way out, and so GEBs could be expected to be offered for that week, I imagine.

Obviously over enough time one little rally would be relatively insigificant, and I am assuming that some strategy of repeatedly buying GEBs would still be effective - but I would like to know more about what's available [eg how many providers, how often they issue, typical limits etc - all bread and butter information that someone - eg like DD - might have some insight on?]

Thanks in advance

Loaded_Bachelor

I agree wit the previous writer that los of dividends is quite significant, perhaps equates to around 2% loss per year comapred to a dividend payong broadbased equity fund.

Another big negative is that unlike a non tied up equity investment you won't be able to get out early should a huge short term rise in the markets happen.

e.g. If the FTSE goes up 60% in year 1, 40% in year 2 but then goes down by 30% in each of the next 3 years you will be as sick as the proverbial parrot.

dunstonh

Also some of these are paid gross but taxable, others paid tax paid but cannot be reclaimed by a non tax payer. Some are also available as an OEIC or ISA.

This distorts the actual return so you cannot rely on the headline participation figure alone. You may choose one that appears high but it may be liable to tax whereas another with a slightly lower participation figure could provide more.