Money Matters

THE NEWSPAPERS are full of gloom with regards to the current bear stock market… this is defined as a market that has suffered a 20 per cent drop from recent highs, or a prolonged period of falls combined with general pessimism.

But for the cautious or no risk investor there are great opportunities presented by what are known in the trade as structured products. These take many shapes but the core principal remains the same, namely capital protection.

For instance, take the Deutsche Bank Defensive Income Plan Two that guarantees 10 per cent gross income for the next five years. You can invest in euros or sterling, and your capital will be returned in full at maturity so long as the underlying blue chip shares don’t drop by more than 50 per cent. At current share levels, companies like Tesco and Anglo American, which have been chosen for their value and defensive nature, should be a reasonable bet.

There are similar structured products for those readers wanting maximum growth, plus a 100 per cent capital guarantee whatever happens after, say, five years. One in front of me promises gearing of 1000 per cent. This means just one per cent market growth will deliver 60 per cent investor return. Your money is linked to either the performance of the US, UK, Europe or Japan, or any combination of these stock markets.

However, if even this looks too risky, consider a new structured note being produced by Barclays Wealth for the clients of a few professional intermediaries. This note also gives a defined return, namely 100 per cent capital protection after five years. In other words, the guarantee is not linked to any shares or stock market performance. Instead, in this case, it’s the income that isn’t guaranteed as it is linked to the performance of a basket of 20 European stocks. If all stock is up at the end of the year, the investor will receive a coupon of somewhere over 12 per cent. If any of the stocks are down but still positive in relation to the euro Stocks 50 Index, the coupon still pays in full. If the stocks are down relative to themselves and the Index, then the coupon will be reduced proportionately. However, by linking to 20 stocks the risk is widely spread, and back tested results look really good if it’s a high potential income that you want, while being able to sleep at night!

Take advice

Those readers who don’t like the sound of structured products, and want the relatively high known returns with no capital risk one can currently obtain in a bank account, may well be missing a trick. Have you considered holding your bank account inside an insurance company’s offshore portfolio bond? If not, then you should take advice for several reasons. Firstly, you can get institutional interest rates that tend to be higher. Then depending on your tax residence you should get gross roll up… or to put it simply, no tax to pay on the interest until you cash the bond… and even then this can be minimized or avoided with planning. Currently on sterling you can get over 6.5 per cent interest after all charges/commissions, which for a 40 per cent taxpayer equates to a gross rate of over 10 per cent! Plus you can have immediate penalty free access to 97 per cent of your capital.

Depending on personal circumstances, five per cent pa tax deferred regular withdrawals are available, and lastly by spreading your investment across numerous banks… all on one form… you get improved investor protection with no administration headaches. Lastly, these insurance bonds can offer simultaneous tax and death tax planning opportunities, and free switching into other investments when the time is right. It’s hardly surprising that major offshore insurance companies are currently taking in billions into these portfolio bonds.

A final word of caution. The charges and terms of all the above vary enormously, so a regulated and professional IFA who knows the market is essential. Their remuneration or commission is built into most products by the providers so need not cost you extra and in many cases the products are not available direct.