A Monthly Publication

By Robin Sainty

Those of you who know me will be aware that I’m not keen on structured products, where one company offers a guarantee which is dependent upon a third party. The dangers of this approach was well illustrated during the credit crunch when it came to light that Lehman Brothers were one company from whom insurers were purchasing such guarantees!

              However, I have been very excited by a new offering from Zurich, which follows similar lines but with the key exception that there is no reliance on a third party guarantee, as the funds are held by Zurich’s in house bank (Dunbar Bank) and are subject to the Financial Services Compensation Scheme, which provides 100% protection on deposits of up to £50,000 per person. However, it’s not just the underpin that makes this product exciting.

Effectively, what Zurich are offering is a 5-year investment with a 100% guarantee of initial capital. Investors money remains in a Dunbar bank account, but the level of interest is linked to the performance of 15 of the top shares in the FTSE 100 index, including the likes of BP, Glaxo Smith Kline, HSBC, Vodafone and Tesco. These shares will only change in the case of takeovers or mergers during the term of the investment.

The plan is firmly aimed at investors who are happy to tie their money up for 5 years, want a guarantee that they can’t lose any of their initial investment, are nervous of investing directly into stocks and shares but are looking for a potentially better return than they can get from a traditional bank or building society account, and is available for pension funds, charities and cash ISA investments as well as for individual investors.

There are a number of things that I find really attractive about this offering, but the main one is that each year on the plan anniversary, the value of the 15 shares is set against their value at the start of the plan (which will be 24th November 2009). An average return is then calculated across the 15 shares based on their rise or fall relative to that starting value. If the overall figure is positive that “interest”, up to a limit of 14% pa gross is added to the account and is thereafter locked in, regardless of future performance. If the overall figure is negative then the worst that can happen is that no interest is added for that year.

The very fact that the starting value of the shares will take place with the UK economy in recession makes this look like a very good deal, and the fact that each years interest is guarantee once added increases the value of the initial guarantee. Effectively, if the maximum interest is added each year, what we have here is an investment with no risk to original capital or any locked in interest already accrued, with the capability of delivering up to 70% gross over the plan term. You have to admit that that is a pretty impressive package!

Clearly those whose attitude to risk means that they are prepared to go for the full impact of stock market performance (however good or bad) should look elsewhere, but for cautious investors who are fed up with meagre deposit rates this is a very interesting option. Having said that, the closing date for applications is 22nd November, so time is of the essence! If you think this may be right for you then speak to your usual adviser, or me if you so wish, because you should never go into investments like this without seeking professional advice.

Turning to the wider investment market briefly, I’m pleased to say that things are continuing to develop in line with my predictions earlier in the year, with both fixed interest and equity funds showing really impressive returns over the last 6 months. While I believe that the economic recovery will be sluggish, we are now heavily favouring asset backed investments over cash as it is difficult to foresee a situation which would persuade the Bank of England Monetary Committee to increase interest rates significantly in the foreseeable future, meaning that deposit accounts are likely to continue to disappoint.