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Investment focus: Investec Defined Returns Plan

Investment focus: Investec Defined Returns Plan

12 August 2013 / by Oliver Roylance-Smith

Investors looking to gain a broad exposure to the UK stock market often look to investments linked to the performance of the FTSE 100 Index. But with the Index continuing its run at historically high levels, many investors are finding it difficult to decide if now is the right time to invest.

So consider the following question – do you think the FTSE could be higher than its current level in either three or five years time? If you do, then the Defined Returns Plan from Investec could offer an attractive opportunity. We take a closer look at this popular investment plan which offers the potential for high investment returns, even if the FTSE only rise by a small amount.

The potential for high returns

An attractive feature about this investment is that it offers two opportunities to provide a return. The plan aims to return either 40.5% at the end of year 3, or 67.5% at the end of year 5 and will do so provided the FTSE 100 Index is higher than its value at the start of your investment.

These fixed returns are equivalent to compound annual growth rates of around 12% at year 3 and 10.85% at year 5. In pure investment terms, the opportunity to achieve double digit returns is always an attractive one, especially if this can occur even if the market has only risen by a small amount. Click here for more information about the Investec Defined Returns Plan »

Some protection from a falling market

As you would expect, in order to have the potential for such high returns your capital is at risk. The Defined Returns Plan contains what is known as conditional capital protection which means that the return of your initial investment is conditional on the FTSE not falling by more than 50% of its starting value.

If the FTSE stays within this 50% barrier throughout your investment then you will receive a full return of your original investment but if it falls below this barrier and also finishes lower than the starting value, your initial investment will be reduced by 1% for every 1% fall in the Index at the end of the plan. Although this provides some protection from a falling market, there is also the risk that you could lose some or all of your initial capital.

Initial index level and averages

The initial index level of the FTSE 100 is taken on 2nd September 2013 and this is used to compare the value of the index at the end of years 3 and 5 of the investment. The Index value at both of these dates is calculated as the average of the FTSE 100 Index on the final day and the four preceding business days (i.e. the average of five business days when the FTSE is trading).

The use of averaging can reduce the adverse effects of a falling market or sudden market falls shortly before maturity. Equally, if can reduce the benefits of an increasing market sudden markets rises shortly before maturity.

Defined risk versus defined returns

One of the features of this investment is that the potential returns are stated up front, prior to investing. This allows the investor to consider the potential upside in the context of the amount of risk they are taking since you know at the outset exactly what needs to happen in order to receive the returns as well as a return of your initial investment.

Risk versus reward

The principle of risk v reward means that the search for potentially higher returns inevitably leads to the need to put your capital at risk. A good benchmark for assessing your investment is to compare what you could get from a fixed rate deposit over a similar timeframe and then consider whether you are comfortable with the risk you are taking in order to receive the potentially higher return.

Leading five year fixed rates are currently offering around 3% and so by accepting risk to your capital, you are potentially increasing your returns by around 9% a year if the plan matures after 3 years and 7.85% a year if the plan matures at the of the term. The decision is therefore whether you are comfortable with putting your capital at risk and the conditional capital protection offered, in order to have the potential for higher returns and the opportunity to protect your capital against the effects of inflation. Click here for more information about the Investec Defined Returns Plan »

Investec Bank plc as counterparty

Unlike a fund, your investment is used to purchase securities issued by Investec Bank plc which are designed to achieve the stated returns - therefore, the financial security of the issuer of those securities (often referred to as the counterparty) becomes an important consideration. This is known as credit risk and means that in the event of Investec going into liquidation, you could lose any future returns as well as some or all of your initial investment and this investment is not covered by the Financial Services Compensation Scheme for default alone.

Credit ratings and agencies

One accepted method of determining credit worthiness of a company is to look at credit ratings issued and regularly reviewed by independent companies known as ratings agencies. Fitch is one of main global credit rating agencies and Investec Bank plc has a credit rating of BBB- with a negative outlook (awarded 28th November 2012).

The ‘BBB’ rating denotes an adequate capacity for payment of financial commitments although adverse business or economic conditions are more likely to impair this capacity with the ‘-‘ signifying it is at the lower end of this rating grade. The negative outlook indicates that the rating may be lowered in the short to medium term, i.e. in the next 6 months to 2 years.

Company profile

Investec Bank plc is an international specialist bank and asset manager with its main operations in the UK and South Africa. Established in 1974, they employ around 7,300 people and look after £96.8 billion of customer assets as well as a further £25.3 billion of customer deposits (as at April 2013). They specialise in a number of areas, particularly within the banking sector and are a leading provider of investment plans and structured deposits.

Investment term

The full investment term of the plan is five years however it also has the ability to mature early at year 3. Therefore, depending on your view of market cycles and what could happen to the FTSE in the next five years, this investment offers two opportunities to return competitive returns.

Although the plan can be sold prior to the end of year 3 or the full investment term, the proceeds you receive will depend on a number of market factors and could mean that you may receive less than your initial investment. Equally, this could be more than your original investment but since the plan is designed to be held for the full term it should only be considered by those who are able to invest their capital for five years.

High potential returns even if the market only rises a little

Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “With the FTSE 100 Index currently at historically high levels, it is understandable why many investors are reluctant to commit to the market at this time. But if you think the Index could be higher in the next 3 or 5 years, even by a single point, then this investment combines two opportunities to provide highly attractive returns as well as offering some capital protection against a falling market”.

The plan is open for new ISA investments (2013/14 allowance of £11,520), ISA transfers and non-ISA investments.

Click here for more information about the Investec Defined Returns Plan »

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek professional advice. Tax treatment depends on your individual circumstances and may change.

This is a structured investment plan that is not capital protected and is not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.

© Fair Investment Company Limited