Investment focus: Investec Enhanced Kick Out Plan
Fixed term investment plans that have the ability to mature early or ‘kick out’ each year seem to be popular whatever the investment climate but particularly so when the market is at historically high levels. The Enhanced Kick Out Plan from Investec currently offers the highest rate of any kick out investment based on the FTSE 100 Index which helps to explain why this plan is proving so popular both with our existing customers as well as new investors. We take a closer look at the plan and review the risk versus reward on offer to see how this might make for an attractive opportunity in the current investment climate.
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 find it difficult to decide whether now is the right time to invest or not.
Investors considering their options are often split down the middle – on the one side are those who feel confident that the Index can break through the 7,000 point barrier and keep going, and then there are those on the other side who remain uncertain that the market will continue to rise at a pace.
The FTSE 100 Enhanced Kick Out Plan from Investec is proving particularly popular with both existing customers and new investors. Many of our existing customers have investments that have matured recently or are likely to mature early in the coming weeks providing them with the opportunity to consider new investment opportunities and many have considered this plan. For new investors, the headline rate of 10.50% is also proving a compelling opportunity in the current investment climate and has been particularly popular with those using their new £15,000 ISA limit – so how does the investment work?
In a nutshell
The plan will return 10.50% per year (not compounded) provide the value of the Index at the end of each year (from year 2 onwards) is higher than its value at the start of the plan – so although the FTSE does have to rise, this only needs to be by a single point. Your initial 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 original investment.
The term ‘kick out’ refers to the ability of the investment plan to mature early depending on the movement of the FTSE 100 Index. Plans that have the ability to mature early and provide a competitive return on your capital have proved popular with investors in all types of markets
The fact that investors can achieve investment level returns even if the market stays relatively flat could also be why this investment has proved particularly popular while the FTSE remains at historically high levels.
The potential for high returns
In addition to the opportunity for early maturity it is no doubt the potential for double digit returns that have added to this plan’s popularity. The headline return on offer has increased in the latest issue to 10.5% annual growth, a level not seen with this type of plan since early 2013. The return is not compounded, but will be paid to you for each year the investment has been in place, thereby offering compelling returns and if the market stays relatively flat or only rises by a small amount, offers the potential to beat the market. If the plan produces a return your initial investment is also returned to you in full along with the growth payment.
Some capital protection from a falling market
When considering investment options it is important to understand the balance of risk v reward. Inevitably, the opportunity to receive higher returns than might be available from cash deposits requires the investor to put their capital at risk.
The Enhanced Kick Out Plan contains what is known as conditional capital protection which means that if the plan fails to produce a return at the end of the term, 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 does not, and the index also finishes lower than the starting value, your initial investment will be reduced by 1% for every 1% fall in the FTSE. Therefore, there is a risk that you could lose some or all of your capital.
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.
Risk versus reward
The principle of risk v reward inevitably leads to putting your capital at risk in the search for potentially higher returns. A good benchmark for assessing any 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 additional risk you are taking in order to receive the potentially higher return.
Leading longer term year fixed rates are currently offering around 3.25% and so by accepting risk to your capital, you are potentially increasing your returns by over 7% a year if the plan matures early or produces a return in the final year. 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.
Credit ratings and agencies
Unlike an investment fund, your investment is used to purchase securities issued by Investec Bank plc and so their ability to meet financial obligations becomes an important consideration. Fitch is one of main global credit rating agencies and as at 28th November 2012, 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 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.
Investec Bank plc
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.
In addition to non-ISA investments, this investment has been one of our most popular with ISA investors and is available as a New ISA up to the current limit of £15,000, and also accepts transfers from both Cash ISAs and Stocks & Shares ISAs. The minimum investment is £3,000.
Fair Investment conclusion
Commenting on the plan, 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 thinking carefully before committing their capital. Depending on your view of what will happen to the FTSE, the ability to provide 10.50% annual growth even if the Index stays relatively flat or only goes up a little perhaps helps to explain why this is one of our best selling kick out plans. In these two scenarios this investment offers the potential to beat the market.”
He continued: “The Enhanced Kick Out Plan from Investec remains a best seller with both growth investors and those looking for New ISA and ISA transfers ideas – and the potential double digit returns on offer from the latest issue are the highest we have seen for some time. On balance, in the current investment climate this plan offers a compelling balance of risk v reward.”
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 circumstances and may be subject to change in the future. ISA transfer charges may apply, please check with your provider.
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.