With the Footsie suffering at the moment, there are one or two investment opportunities available which strike me as offering attractive returns in the coming years with protection against downside losses.
In November I wrote about structured products and I have recently received details of two based on the FTSE 100 Index, which look very attractive at its current level.
Firstly, some history. The FTSE peaked in December 1999 at 6,930, but subsequently fell to 3,287 in March 2003, then rallied to another peak of 6,732 last July.
Ever since it has been extremely volatile before settling around its current level.
The two offers I have recently been reviewing, the Keydata Dynamic Growth Plan Issue 6 and the Premier UK Growth Plan Issue 37, are both for a fixed six-year term and provide capital guarantees as long as the index does not fall by more than 50 per cent during this period. Hence, to lose money the index would have to tumble to below around 2,850 at current levels, a scenario almost unbelievable even with the present economic difficulties.
You might point out that the figures I have given show that the 2003 low was more than 50 per cent down from the December 1999 high.
But the current circumstances are different in that these two growth plans are being offered after seven months of volatility on the stock market and the Government bail-out of Northern Rock. It was the 18th Century German philosopher Friedrich von Schiller who said: "Anyone taken as an individual is tolerably sensible and reasonable – as a member of a crowd, he at once becomes a blockhead."
But despite the fact the herd instinct has much to do with the severe fluctuations on the money markets, investors should have realised by now that past history has shown a large market downturn is eventually followed by a market recovery.
The upside on the Keydata plan is a return of 10 times any rise in the FTSE 100, subject to a maximum investment growth of 80 per cent.
Hence, the index only has to rise by eight per cent over the six-year term from its starting level, which will be in April, to achieve the maximum.
For the Premier UK Growth Plan, there is a rolling annual return of 16 per cent per annum and this is simply dependent upon the index being equal to or greater than the starting level.
If this happens after the first year, then the investment is paid out with a 16 per cent gain and the term ends.
If this is not achieved in year one, the investment carries forward to year two, and if the index is then equal or greater to the starting level, then a return of 32 per cent is paid and so on until a maximum possible return of 96 per cent at the end of year six.
These are two very different ways of playing the index, but with significant downside capital protection.
The other interesting and attractive point to consider about these schemes is that the profit comes under capital gains tax, not income tax. As you will be aware, the basic capital gains tax rate is reducing from 40 per cent to 18 per cent from April 6.
This is obviously far more attractive, particularly for higher rate income payers, than suffering 40 per cent tax charge on interest or profit from insurance bonds. In addition, of course, there is the annual capital gains tax allowance, presently £9,200, which is often not used by investors.
Both of these schemes are available to investors via an ISA to shelter the profits totally from capital gains tax. They can also be held within a Self Invested Personal Pension (SIPP) or SSAS.
This article is not an advertisement or promotion for either of the schemes. But it is intended to draw attention to the opportunities that are available given the relative value that exists in equity markets at present levels.
Combined with the downside protection and the tax benefits, it is well worth obtaining full details and taking professional advice to decide whether they should form part of an investor’s portfolio.
* Trevor Law is a director with Montpelier Group (Europe), the privately-owned independent financial advisers located at Barston, near Solihull.