Investment Focus – Investec Defensive Enhanced Returns Plan
The recent falls to the FTSE 100 Index are a useful reminder that none of us are able to predict the stock market with any real certainty and that trying to time the market with our investments is far from an exact science. But whether you are of the opinion that the FTSE may rise significantly in the medium term, continue to meander above 6,000 points in the coming years or indeed fall slightly below this level, we take a look at one particular investment that offers the potential for attractive returns in all three of these scenarios.
Defensive plans proving popular
Whatever the future may hold, the FTSE has been consistently above 6,000 points since the start of 2013 and because the Index has never broken through the 7,000 point barrier in its 30 year history, what this does tell investors it that it continues to remain at historically high levels. When faced with this investment landscape, it is perhaps understandable why investment plans that aim to offer competitive returns even if the market falls are being considered. Indeed, these ‘defensive’ plans are proving to be an increasingly popular alternative to the more traditional growth investments which rely on the markets rising in order to produce a capital gain.
In a nutshell
The Defensive Enhanced Returns Plan aims to provide a minimum return of 68% at the end of the six year term and will do so provided the value of the FTSE at that point is more than 90% of its value at the start of the plan (subject to averaging). Therefore, the FTSE can fall up to 10% and you would still receive a 68% return plus your original capital whilst if the FTSE increases by more than 68% over the term, you would receive this higher amount.
If the Index falls by 10% or more, no growth will be achieved and the return of your initial capital is dependent on the performance of the FTSE. Your capital is at risk if the Index falls by more than 50% during the term and also finishes below its starting value, in which case your capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.
The potential for high returns
The 68% return is an attractive headline since this is a fixed return and is paid whether the FTSE goes up, stays flat or even falls by up to 10%. This equates to around 9% compound annual growth and even if the FTSE were to rise by more than this amount, the plan also includes the option to return any increase in the Index if higher than 68%, without any upper limit. Investors should though note that the FTSE 100 Index does not include the impact any dividends may have on the overall return.
The fact that the plan offers investors the opportunity to significantly outperform the market in the event that the FTSE either goes down slightly or only rises by a small amount could be an attractive feature for those looking for investment ideas whilst the Index continues at historically high levels.
The use of averaging
When calculating the final level of the FTSE 100 at the end of the term, the plan takes the average of the closing levels of the Index for each day of trading during the last six months of the investment. The use of averaging can reduce the adverse effects of a falling market or sudden market falls shortly before the end of the plan whilst it can also reduce the benefits of an increasing market or sudden increases in the market during this six month period.
Some capital protection from a falling market
Provided the FTSE 100 Index has not fallen by 10% or more at the end of the term, your initial investment is returned to you along with either the 68% return or any rise in the FTSE 100 if higher. Should the Index have fallen by 10% or more, your original capital is still returned to you unless the Index has fallen by more than 50% at any time during the term of the investment. If it does fall below 50% and also finishes below the 90% barrier needed to provide a return then your initial investment is reduced by 1% for each 1% fall, therefore you could lose some or all of your capital.
Since the market can fall up to 50% before your initial investment is at risk, the plan offers some capital protection against a falling market. This should be considered in conjunction with the potential returns on offer when reviewing the plan’s overall risk versus reward.
Defined risk and 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.
Credit ratings and agencies
Unlike an investment fund, your investment is used to purchase securities issued by Investec Bank plc. This means that their ability to meet financial obligations becomes an important consideration since if the bank fails or becomes insolvent, this could affect both the payment of any growth return as well as the return of your original investment and you would not be covered by the Financial Services Compensation Scheme for default alone.
Fitch is one of the main global credit rating agencies and as at 22nd January 2014, Investec Bank plc has a credit rating of BBB- with a negative outlook. 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 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.
Investec Bank plc profile
Investec is an international specialist bank and asset manager with its main operations in the UK and South Africa. Established in 1974, they currently employ around 8,200 people and as at April 2014, look after £109.9 billion of third party assets under management. They provide a range of financial products and services and specialise in a number of areas, particularly within the banking sector. Their UK banking operation, Investec Bank plc, looks after £11.1 billion of customer deposits. They are also a market leading provider of investment plans and structured deposits.
Fair Investment view
Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “Depending on your view of what will happen to the FTSE, the ability to provide a 66% fixed return even if it stays relatively flat or only goes up a little could be particularly attractive in the current investment climate. In these two scenarios this plan offers the opportunity to beat the market whilst investors can also gain if the Index rises significantly.”
He continued: “Whilst the FTSE 100 Index continues to remain well above 6,000 points it is understandable why many investors are considering defensive investment plans and the Enhanced Returns Plan strikes a compelling balance of risk v reward.”
The plan is open for New ISA investments up to the £15,000 allowance for current tax year (2014/15) as well as non-ISA investments and the minimum investment is £3,000. Investors interested in transferring existing Cash and/or Stocks & Shares ISAs will be able to do so in the next issue of the plan which is due in early November.
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 of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring or switching an ISA.
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.