Investment Focus: Investec Defensive Growth Plan
Defensive investment plans have grown in popularity as they offer investors who are not confident the markets will rise further the opportunity to produce a competitive return on their capital. But the start of the New Year has brought with it increased volatility in the market and it is against this backdrop that we review Investec’s FTSE 100 Defensive Growth Plan. So how does this latest addition to their range of fixed term defensive investment plans stack up?
Apart from a few days during the summer and mid-December last year, the FTSE 100 Index had closed above 6,000 points on every day between 2013 and 2015. The lowest level was on 24th August 2015 when the Index closed at 5,898 points whilst the highest closing level over this period was 7104 towards the end of April last year. This level also represents the highest closing level of the FTSE on record, having broken through the 7,000 point barrier for the first time ever last March.
2016 and beyond
Whilst the FTSE has remained at what are historically high levels, defensive investment plans that offer the potential for investment level returns even if the stock market fails to rise or, in some scenarios, even falls slightly, have been an increasingly popular choice with our new and existing investors. However, the start of the New Year has already brought with it a rather different investment landscape. The FTSE opened 2016 at 6242.3 and yet closed last night at 5779.9, a drop of 462.4 points which is equivalent to a 7.4% fall in value. By any standards this is a sizeable reduction.
Please note that past performance of the FTSE 100 Index is not a guide to its future performance.
So what might this mean to us as investors and where do think the FTSE might go in the medium term? Well, if you have doubts that it will continue to reach the 7,000 point mark again in the coming years, or indeed surge pass this level, then this latest new launch from Investec might just be worth a closer look.
In a nutshell
The FTSE 100 Defensive Growth Plan aims to provide a fixed return of 36% at the end of the six year term and will do so provided the value of the FTSE at that point is higher than 50% of its value at the start of the plan (subject to averaging). Therefore, the FTSE can fall up to 50% and investors would still receive a 36% growth return, along with a full return of their original capital.
If the Index has fallen by 50% or more at the end of the term, no growth will be achieved and your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.
36% return even if the FTSE falls up to 50%
This is a strong headline since investors will receive a positive return, even if the FTSE falls up to 50%. This means that even if you are not confident the FTSE will rise at all, you could still receive a fixed return of 36% unless the FTSE falls by 50% or more. The 36% return is equivalent to 5.25% compound annual growth.
Since the fixed return on offer is dependent on the performance of the FTSE 100 Index, the defensive element of the plan is an important one to understand. Rather than the Index having to finish higher than its value at the start of the plan, the Index can fall up to 50% and the fixed return of 36% is still paid. Whilst the FTSE continues to remain at what are historically relatively high levels, this ‘defensive’ feature could be an appealing one.
The use of averaging
Whether the plan pays the 36% fixed return is determined by comparing the value of the FTSE 100 Index at the start of the plan (the closing level on 1st March 2016), with its value at the end of the plan or the ‘Final Index Level’. When calculating the Final Index Level the plan takes the average of the closing levels of the Index on each business day during the last 6 months of the plan term. The use of averaging can reduce the adverse effects of a falling market or sudden market falls whilst it can also reduce the benefits of an increasing market or sudden increases in the market during the last six months of the plan.
Some capital protection from a falling market
Provided the FTSE 100 Index has not fallen by 50% or more at the end of the term, the 36% growth return is paid to you along with a full return of your initial investment. Should the Index have fallen by 50% or more your initial investment is reduced by 1% for each 1% fall. In this case you would lose at least 50% 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 return on offer when reviewing the plan’s overall risk versus reward.
Defined risk and defined returns
One of the features of this plan 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 stated level of growth as well as a return of your initial investment.
Please note that the first issue of this new plan is only available as an ISA. The plan also accepts ISA transfers, from both Cash ISAs and Stocks & Shares ISAs.
Credit ratings and agencies
This plan is a structured investment so your initial capital is used to purchase securities issued by Investec Bank plc. These securities are structured in a way so that they provide the growth and return of capital as described and also means that Investec Bank’s ability to meet their financial obligations becomes an important investment consideration. 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 27th October 2015, Investec Bank plc has a credit rating of BBB with a stable outlook. The ‘BBB’ rating denotes a good credit quality with low expectations of default risk. The stable outlook indicates that the rating is not expected to change 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 2015, look after £124.1 billion of customer assets. 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 £10.3 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: “With a product headline of a 36% growth return unless the FTSE 100 Index falls by 50% or more, the risk versus reward of this plan is relatively easy to understand. Whilst the FTSE continues at what are historically high levels it is understandable why many investors are considering defensive investment plans, and so depending on your view of what will happen to the Index in the medium term, the ability to produce over 5% compound annual growth provided the market does not fall 50% could be a compelling one.”
The plan is open for New ISA investments up to the £15,240 allowance for the current tax year (2015/16) as well as Cash ISA and Stocks & Shares ISA transfers. The minimum investment is £3,000.
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.
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.