With the potential for double digit returns from an investment always demanding our close attention, we take a look at two plans offering the opportunity for the same headline rate of 10%.
The opportunity to receive 10% from our investments should never be overlooked and both the Early Bonus Plan from Legal & General and the Defensive Bonus Plan from Morgan Stanley offer just that.
Both investments are based on the performance of the FTSE 100 (the FTSE), have the same investment term and both have the ability to potentially mature early or ‘kick out’ – so what sets them apart?
Early Maturity – the chance to ‘kick out’
Although these should be considered full term investments, the ability to mature early is an attractive feature among investors and plans of this type normally include the ability to kick out at the end of each year.
The main difference between the investments is the earliest year that the plan can kick out, the earliest of course being year one. The Legal & General plan can kick out from year one whilst the Defensive Bonus Plan has year 2 as the earliest point the plan can mature. Therefore, your view of what might happen to the FTSE in the shorter term may determine which of the two investments better meets your needs.
Required level of the FTSE
The majority of plans released in recent years have required the FTSE to be at a higher level than its value at the start of the investment. Therefore, provided you were of the opinion that the index could be higher at the end of one of the following five or six years, even by just a single point, this offered the opportunity to provide high investment returns.
The Early Bonus Plan follows this traditional route and requires the FTSE to be higher than its starting level; however, the Defensive Bonus Plan will still mature even if the FTSE has fallen by up to 10% from its starting value. This so called ‘defensive’ feature is one that has become more common as the values of the FTSE have been at slightly higher levels and it balances the fact that the Morgan Stanley plan cannot kick out in year 1.
Conditional capital protection
If either investment kicks out, then your original capital is fully protected and will be returned to you along with the growth on your investment. However, if either investment continues to the full term then both plans contain what is known as conditional capital protection. This means that your initial investment is protected on the condition that the FTSE has not fallen by 50% or more.
If the FTSE has not fallen by 50% or more on the last day only of the investment, your capital is still protected and your will receive all of your initial investment back. However, if the FTSE has fallen by 50% or more, your initial investment will be reduced by the same amount that the FTSE has fallen by. Therefore, in this scenario you would lose at least 50% of your investment and as such each investment should only be considered by those who are prepared to put their capital at risk.
This defined risk is a feature that works in the same way for both investment plans and is a major differentiator when comparing them with investment funds and portfolios which put all of your capital at risk on a daily basis rather than at predetermined dates.
Since your investment is used to buy securities designed to achieve the stated returns, the financial security of the issuer of those securities (often referred to as the counterparty) becomes an important factor, because if they are unable to fulfil their payment obligations (due to becoming insolvent), you may lose some or all of your investment.
Ratings agencies provide an insight into the credit rating of financial institutions and therefore allow a comparison of the credit risk associated with different companies and investments. Standard & Poor’s is one of three leading credit rating agencies.
As at 17th August, Morgan Stanley had a credit rating of A- with a negative outlook. The ‘A’ rating denotes a strong capacity to meet financial commitments whilst the ‘-‘ signifies 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.
The counterparty for the Legal & General investment is Abbey National Treasury Services Plc which is a wholly own subsidiary of Santander UK plc. As at 17th August 2012, Santander UK plc also had a Standard & Poor’s ‘A’ rating but with a stable outlook which indicates the rating is not likely to change in the short to medium term.
All investors welcome but watch out for deadlines
Both plans accept direct investments, new investment ISAs as well as ISA transfers. Both plans also have the same minimum investment of £3,000.
Both investments are available now for investment, with a direct and new ISA deadline for applications of 14th September for Legal & General and 12th September for Morgan Stanley. ISA transfer deadlines are slightly earlier at 31st August and 5th September respectively.
In a nutshell
Conditional capital protection offers some protection in a falling market, since unless the 50% barrier is breached on the final day of the investment, you will at least receive your initial investment back.
Further, the Morgan Stanley plan offers high returns even in a slightly falling market since the investment can mature even if the market has gone down by up to 10%. Legal & General’s investment will only provide the 10% returns if the index goes up, albeit only by a very small amount although it can mature at the end of the first year whilst the Defensive Bonus Plan can only mature from year 2 onwards.
Therefore, although these plans have many similarities such as investment term, conditional capital protection, the ability to mature early and the potential for the same high returns, there are a few differences that sets them apart, thereby catering for slightly different views on what will happen to the FTSE and when.
Find out more information and request a brochure for the Legal & General Early Bonus Plan »
Find out more information and request a brochure for the Morgan Stanley Defensive Bonus 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.
Some structured investment plans are not capital protected and there may be the risk of losing some or all of your initial investment. There is also 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 which case you may not be entitled to compensation from the Financial Services Compensation Scheme (FSCS). In addition, you may not get back the full amount invested 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.
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