September 11, 2008 | posted by Pam Atherton in Investments, Savings |

Structured products have been heavily promoted in recent years as a way of protecting your capital against heavy stockmarket falls.

Often referred to as ‘guaranteed equity bonds’ or GEBs, structured products  claim to provide a return related to growth in the stockmarket and a guarantee against losing your original investment.

But research by the Investment Management Association shows that many of these claims should be taken with a pinch of salt because GEB providers are not required to report on stockmarket performance, making it hard to assess the accuracy of the claims they make about their products.

National Savings & Investments (NS&I), one of the few providers which does disclose such information,  has launched five GEBs  over the last two years.

The IMA compared the performance of NS&I’s five GEBs with that of a FTSE 100  index tracker,  against which the GEBs are benchmarked.

It found that if you had bought the index tracker, your return would have been around 3.5 per cent higher than the average return from NS&I’s GEBs, net of charges.

IMA chief executive, Richard Saunders, says: “While GEBs offer a guarantee against the index falling over a five year period, that is a relatively unusual event.

“The index has seen significant falls since 2000, but it is currently around 30 per cent higher than its level in 2003.  Before 2002, the last time it was down over five years was in 1978. Investors may not realise just how much return they are giving up in order to be protected against what is a rare event.”

The last few years have seen considerable volatility in the stockmarket and the FTSE 100 is currently below its level in 1998. But risk can be managed and the key to achieving this is through diversification, both over asset classes and over time.

A portfolio invested across all 30 IMA fund sectors would have produced an average return of 5.2 per cent over the last 10 years, beating inflation and the risk free return (from Government index linked bonds).

Diversification over time can be achieved by investing on a regular monthly basis which enables you to benefit from the effect of ‘pound cost averaging.’ 

The latter is the mechanisim whereby if you invest on a monthly basis, you will buy more units on the dips and fewer shares on the highs, smoothing out investment risk over the long term.

Defaqto wealth management principal, David Abbis, says:”No investor wants to receive less back than the amount invested, but few wish to pay for a guarantee. Careful planning for a medium to long term investment with regular monitoring of funds can produce a reasonable return at minimal additional cost.”

Visit the Defaqto Best Buy tables (click on any of the unit trust sectors on left hand side):
http://www.defaqto.com/consumer/investments/unit-trust-sectors.aspx