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Investec launch new tranche of Structured Deposit and Structured Investment Plans.

Investec’s new plan terms were launched yesterday.  Click the link below in order to read and understand the new plan terms:

For the 10th year in succession, Investec were awarded ‘Structured Product Provider of the Year’ in the Moneyfacts Awards.  Click the link to read the Moneyfacts Awards winners:

We thought you may wish to further gather information in respect of the main differences between Structured Deposit Plans and Structured Investment Plans.

Structured Deposits

Structured Deposits are cash alternatives. They’re covered under the Financial Services Compensation Scheme up to £85k in exactly the same way as money in a bank account.  Although they have their upside linked most commonly to the FTSE 100, there’s no market risk. The outcomes are binary.  If the market is above a pre-defined level, then the investor gathers their coupon.  If the market is lower than that level, they receive a full return of capital – so this is the difference between ‘interest’ and a ‘coupon’ where the underlying generator of returns is an index investment.

As there’s no risk to the initial investment (up to the £85K FSCS limit), the main consideration from a cash alternative perspective is the opportunity cost of sacrificing a fixed rate of interest.  However, with rates on most cash products still at historic lows and below inflation, that opportunity cost might be considered very low, especially when returns on Structured Deposits can be up to 7% interest per annum.  The FTSE 100 6 Year Deposit Plan 15 has the potential to generate a 42% return if the FTSE 100 is higher than its starting level after 6 years, this is equivalent to 7% per annum (not compounded).  Certainly worth considering as part of an investment programme.

In addition, Investec have also launched a plan that can produce a positive return regardless of where the index finishes. The FTSE 100 6 Year Defensive Deposit Plan 25 (Min Return version) – this provides a return of your initial deposit plus 18% if the FTSE 100 is higher than its starting level after 6 years, or 9% if the FTSE 100 is equal to or lower than its starting level after 6 years.

With interest rates persisting at historic lows and record levels of money sitting in cash, we see a real opportunity for Structured Deposits to provide a solution for those clients dissatisfied with current cash rates but looking for positive real return.  As an example, there’s currently £267bn in Cash ISAs with an average return of <1%. This is an area where we’ve seen a substantial increase in investment, with ISA Cash Transfers moving into Deposit Plans that currently offer a variety of coupon rates – with Plan 15 providing a potential coupon of up to 7% p.a. (simple).

Structured Deposits – with the security of capital protection Deposit Plans have been an under-utilised product by investors, so we are doing our best to highlight the value and benefits to investors.

Structured Investment Plans

Structured Investment Plans are higher risk and offer potential higher returns to compensate.  The two key differences are the fact they’re no longer covered under the Financial Services Compensation Scheme and therefore have counterparty risk with the underlying bank (similar to holding a corporate bond). They also have market risk if the reference index were to go below a certain level, most commonly a 40% / 50% fall. This market risk is often referred to as a barrier, and is absolutely a risk consideration, but does provide investors with significant downside protection versus direct exposure to that index.

Looking at the Investment Plans as an equity alternative, they can be used as an effective way of de-risking a portfolio if investors are concerned about the growth prospects in developed equity markets. With almost unprecedented geopolitical risk causing increased fear and uncertainty, the fundamental mechanics of Structured Products mean they have the ability to produce a positive return in a rising, flat, and even falling market. Combined with the downside protection against market risk, Structured Investment Plans can be a complement or alternative to traditional and direct market exposure.  We feel that a combination of all product types, blended with allocation diversity, through sectors and geographies is essential – while ensuring adequate liquidity and tolerance to capital loss must be the focus to investors.

The FTSE 100 Enhanced Kick-Out Plan 89 has the potential for maturity each year from the end of year 1 onwards with a fixed payment equal to 10% per annum (not compounded) if the FTSE 100 is higher than its starting level. If the Plan runs for the full 6 years and at the end of 6 years the FTSE 100 finishes lower than 60% of its starting level, an investor will lose some or all of their initial investment.

Investec launched into this market in 2008, and since then have issued 1,083 products with an average return of 5.46% p.a. deposits and 9.14% p.a. on investments.  Another key point to note is of those Plans which have matured over this time, zero have resulted in any capital loss for investors.

Although the smaller of the two numbers, we feel the return on deposit is actually more impressive. To consistently generate a meaningful return on cash during a period of sustained low interest rates really demonstrates the value the plans can offer an investor’s portfolio.

Don’t Forget the Risks

As with all forms of investment there are risks involved.  Structured Investment Plans do not guarantee to repay the money invested. The potential returns of the plans and repaying the money invested are linked to the level of the stock market and also depend on the financial stability of the Issuer and Counterparty Bank.

The promotion of the plans does not constitute ‘advice’ to invest. Advice is always specific to an individual investor’s circumstances and needs, following the process of ‘know your customer’, with the aim of ensuring that any product is suitable for an investor.

As always, the recommendation and common sense approach is to consider product solutions as a portfolio, never over-exposing oneself to a point of financial pain and suffering liquid or counterparty exposure.

As always, if you require advice simply get in touch.

We assure you of our best and focused attention at all times.

Warmest Regards.

Best Price FS Team

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