Investing in the FTSE 100 in the current climate

Investing in the FTSE 100 in the current climate

18 September 2012 / by Oliver Roylance-Smith

With the FTSE hovering between 5,500 and 5,900  points for the last few months, it is interesting to find out how investors as well as investment providers are reacting to the current climate. We take a look at the impact the past performance of this important benchmark may have as well as review some of the options that investor’s are considering.

The FTSE 100

As the most recognised and followed Index in the UK, the FTSE 100 (the FTSE) is often the first port of call for investors who are prepared to put their capital at risk in the hunt for the potential for high returns.

As a result, movements in this benchmark index of UK blue-chip shares can not only have a profound impact on our overall investment performance, but also our attitudes towards investing as well as the types of investments available.

Performance overview 

First off, let us have a quick review of what the FTSE has done – it has certainly been an eventful few years. The following table covers the opening values of the 12 month periods between mid Septembers for the previous five years:

 
Timeframe
Lowest level
Highest level
Range (points)
Sep 2011 to Sep 2012
4944.4
5965.6
1021.2
Sep 2010 to Sep 2011
5007.2
6091.3
1084.1
Sep 2009 to Sep 2010
4805.8
5825.0
1019.2
Sep 2008 to Sep 2009
3512.1
5311.3
1799.2
Sep 2007 to Sep 2008
5150.6
6730.7
1580.1
 

As you can see, in each of the three previous 12 month periods the FTSE moved within a range of more than 1,000 points, with far wider ranges during the more volatile years that preceded this timeframe. The FTSE opened this week at 5915.5, the highest opening value for almost 6 months.

What does this tell us?

We should all understand that past performance is not a guide to what will happen to the future and it is also important to remember that different timeframes can obviously produce different results.

With this in mind, it is useful to remember that the period covered above includes the stockmarket crash in 2008/09 and since this is also the most recent five years of investment performance, this would seem as good a timeframe as any within which to understand what the FTSE is capable of.

The investment dilemma

It also shows how much the FTSE can change over a relatively short timeframe and so for investments which broadly follow the value of the FTSE on a daily basis, the start and end value can have a huge impact on our overall returns.

If you are fortunate enough to go in at or about the lowest point then you are potentially in good shape. However, you still need to make the right call as to when to come out of the market, a seemingly difficult task that will often fly in the face of investor emotion. Certainly getting both of these right based on anything other than chance would appear to be impossible.

Defined Return, Defined Risk

It is exactly these difficulties with open ended investments, particularly those which track an index, which has increased the use of investments which provide a defined level of return for a defined level of risk.

These are normally fixed term investments of 5 or 6 years in length where you know right at the outset, prior to investing, what needs to happen in order to produce the stated returns. In terms of assessing how the investment may or may not fit your needs, you are therefore well positioned.

Kick Out Plans look attractive

One particular type of fixed term investment which is popular in all kinds of market conditions is the autocall investment or ‘kick out’ as it is more commonly known. These investments have the ability to mature early, normally from year 1, potentially providing the investor with the headline rate of growth for each year the investment has been in place.

Whether the plan kicks out in the future will usually be dependent on the FTSE being at a certain level and this is normally compared to the level at the start of the investment. Therefore, it is clear to see why with this type of investment, one could take the view that the lower the starting value the better. 

Early maturity

Indeed, these investments have grown in popularity in recent years with many of our customers currently receiving the maturity proceeds from their investments since the recent levels of the FTSE have been higher than the values at the same date in previous years.

The early maturity feature which is unique to these plans brings a new element to the investment opportunity and means that although your longer term view of the FTSE is important, so is your view on the potential for the FTSE year on year.

Just a single point higher

This is because if the FTSE stays relatively flat but is just one point higher 12 months later, these investments will mature, some of them providing double digit returns. In this context, the ability to beat the market is obviously appealing and which is why even when the FTSE is high, kick out investments can also prove to be a popular strategy.

Our current range of offers where the level of the FTSE needs to above the starting level includes the Investec Enhanced Kick Out Plan with a potential 13% growth return.

Defensive options

The increase in popularity of this type of plan has grown in reaction to the recent levels of the FTSE since defensive kick outs cater for the investor concern that the FTSE will go down in the future by offering a certain level of protection against slight falls in the market.

One example is the UK Step Down Defensive Kick Out from the Royal Bank of Scotland where the level of the FTSE required for the plan to mature early falls by 3% each year with a headline growth rate of 7.5%. This means that in the final year, the value of the FTSE can be up to 15% below the value at the start and your plan would still kick out. All things being equal this therefore offers the investor a wider opportunity for the investment to kick out than those which are based on the index being at least as high as its starting level.

The best of both worlds

Our most popular kick out investment at present is the Defensive Bonus Plan from Morgan Stanley since it combines the potential for high returns with the provision of some protection against a slightly falling market.

This protection comes in the form of a reduced FTSE level for the investment to mature early, although the investment can only kick out from year 2 onwards. A new issue has just been launched and they have been able to maintain the competitive headline return of 10% as well as the 90% barrier for measuring against the starting level of the FTSE.

Ask yourself how you would feel in the following circumstances:

-    the FTSE has risen 30% in 2 year’s time and you received 20%;
-    the FTSE has risen 10% in 2 year’s time and you receive 20%;
-    the FTSE is at the same level in 2 year’s time and you receive 20%;
-    the FTSE has fallen almost 10% in 3 year’s time and you receive 20%.

Defined risk

Always remember to balance this potential upside with the fact that your capital is at risk. Most of these plans contain conditional capital protection which means that you receive your initial investment back in full unless the value of the FTSE falls by more than 50% (measured either throughout the investment or on the final day only).

In this case your initial capital is normally reduced as if you had been invested in the index itself, i.e. by the same amount as the fall.

Meeting investor needs

The kick out is then a flexible type of investment and the various features which combine to make up the plan can be adapted to the prevailing investment climate providing the potential for an attractive proposition in all market conditions.

Depending on your view on what will happen to the FTSE in the coming years, there should be something to meet your needs.

Request a brochure for the Morgan Stanley Defensive Bonus Plan »

Request a brochure for the Investec Enhanced Kick Out Plan »

Request a brochrue for the RBS UK Step-Down Defensive Kick Out Plan »

Compare Kick Out investments »

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 independent financial 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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