Capital guarantees and potential for returns
“I can’t lose more money! Guarantee my capital and find me more upside…”
A hypothetical client comment but one that may ring true to you.
Richard Kelsall, Head of Marketing Investments at Aviva reviews the marketplace and looks at possible solutions.
Investor confidence dented
“It is not surprising that many investors may be wary of returning to stock market investments following the events over the last 18 months. The stock market crash in 20081, volatility in the market, high-profile company collapses such as Lehman Brothers and government interventions in the banking sector have dented confidence,” states Richard. “Even commercial property has seen a fall in value.” 2
The rates of return available on deposit accounts remain depressingly low with base rates now at 0.5% after falling from 4.5% in October3. As a result, banks and building societies are struggling to offer more than 2.5% on instant access savings accounts.4 Clients previously used to higher rates of return will be suffering a fall in income or much slower capital growth if on deposit in instant access accounts. Whilst all investors should have accessible savings, those able to invest for five years or more are seeking alternatives.
The question for many investors is, ‘How do I protect my money but at the same time obtain any sort of meaningful return?’
“Client’s might consider adding an equity element to their portfolio. A quick look at the FTSE All-Share dividend shows a yield of 4.69% on 7 July,” 5 commented Richard.
“It comes down to the age old question of risk versus reward. Following the large falls in most asset classes in recent times, it is understandable if an investor is more focussed on the risk element.”
Give me Guarantees
In this environment, some clients may need more reassurance and assistance from their advisers to understand the different options that are available to them.
For those cautious investors, a full guarantee that they will get their money back may be the only solution that satisfies them.
Structured products may be one solution but as most of these are limited offers, advisers need to be quick to spot suitable opportunities for their clients.
“When recommending structured products careful attention has to be paid to the way the guarantee is constructed. It may involve third parties, whose strength also needs to be considered alongside that of the provider.”
“An alternative might be a managed fund that offers a guarantee. Of course, the same level of due diligence is required by the adviser on behalf of their client to ensure it meets their requirements.”
The Guaranteed Fund
“Take the Aviva Guaranteed Fund for instance. For some advisers and their clients this may represent an opportunity that appeals in this climate. The following factors are worth considering:
- The Fund is actively managed, with the aim of maximising capital growth whilst providing a guaranteed return of at least the initial investment on the 5th anniversary no matter, what happens in the market However, if an investor makes withdrawals, the guarantee reduces in proportion to the number of units cancelled. This may mean the investor gets back less than the original amount invested.
- The Aviva Guaranteed Fund has been around for over 13 years taking the fund through two bear markets indicating an ability to cope with differing market conditions.
- Through investment in a mixture of asset types, including equities, corporate bonds, gilts, property and cash, the Fund aims to avoid the ups and downs of one particular asset type. Although it does carry more risk than investment in cash. As only a proportion of the Fund is invested in equities there is a lower risk associated than 100% investment in equities.