Interest in capital protected products continues to grow on investor fears of more volatility to come, despite the fact that markets have already experienced significant falls
The trend in the market for major financial organisations to launch capital protection products is showing no sign of diminishing. There is good reason. There remains a significant demand for these type of low risk products, particularly in the mass and high net worth market sectors.
Growth in capital protection products has been so great that many intermediaries now recognise them as a key element of an investment portfolio. They sit happily alongside deposits, bonds and equities.
The schemes themselves have adapted to offer a range of investment alternatives. The term of the scheme can vary from two or three years to four or even 10 years and the investment focus itself has moved into more and more diverse markets, enhancing their attractiveness to a widening range of investors.
Competition in the marketplace has also helped to widen their appeal as respective financial service organisations seek to make them as attractive as possible.
Although the rationale behind their introduction was to provide a product that would appeal to the cautious investor attracted to the possibility of still investing successfully in the markets, it would be wrong to classify as cautious all customers that take up the offers in this investment bracket.
One of the great strengths of these schemes is that they appeal to a complete cross section of the investment community. Inevitably, small investors with around £5,000 or more to invest (the typical minimum balance) make up a high proportion of investors, but there are clients that invest significantly more. High net worth clients are also drawn to the low risk nature of the schemes and we have many instances where an individual will invest more than £1m in a particular scheme. It is also common for clients to invest in more than one fund as new issues are launched.
The conditions that first set alight this style of capital protection scheme remain a fixture in the world markets. Uncertainty still prevails and the volatility that presides over the equity markets, fuels the sense that direct exposure could be costly. For some investors, this fear is certainly too high a risk. Too many investors have lost money or, even if they personally have not been burnt by the process, they have friends or colleagues that have.
There are always conflicting messages coming from the markets in terms of economic outlook and the prospects for certain regions or stocks, and these also affect the confidence of many wealthy investors, who in turn ask their intermediaries to seek out alternatives. It was inevitable that the industry would devise and package products that would satisfy this type of investor, clients who may want some upside in terms of returns but certainly do not want to expose their capital to a great degree of risk.
The schemes have adapted considerably. They began as a basic product linked to growth of one index, coupled with the 100% capital security feature and a specific gearing. A typical scheme would offer 70% of the index growth from the FTSE 100, for example, over three or five years. There would be a limited period in which investors could sign up and a minimum balance set at a level that would benefit small investors.
However, over the years new innovations have been added. New index links were introduced and specific sectors targeted. When growth in the markets abated, it became necessary to introduce minimum returns. Lock-ins were introduced during the terms to offset volatility and to compensate for the worst in market performance. Bonuses have also been a recent introduction to boost growth potential with more steady-paced growth predicted in the market.
The variety of products now available is huge, with links extended to foreign exchange movements and even gold prices as well as the more retail focused offerings for the less experienced investor.
Product providers have become ambitious in the range of markets and the sectors in which the investment has been placed. In addition, to investment in the UK and US markets, schemes have been launched which invest in specific euro zone stock markets, in Switzerland and in Asia, particularly China, South Korea and Taiwan. Market sectors have also been a focus including pharmaceuticals and healthcare and, primarily in the Asian markets, gold and foreign exchange movements. The diversity has been another reason why their popularity has increased and why they feature more readily with clients with investment portfolios.
The use of capital protection schemes is a good way to introduce cautious customers to the market with minimal risk and an excellent way to gain access to more adventurous markets without the high risk. Also, in times of volatility the minimum return options can ensure clients are compensated for lack of growth in equities. Our experience is that financial advisers are rightly paying more attention to these schemes. Often, if intermediaries have not considered them, it will be clients themselves that contact us directly.
In tough market conditions, it is inevitable that many clients will be reluctant to reinvest directly into funds where they perceive their capital may be more at risk. Capital protection schemes are easy for the investor to understand. The combination of low risk, capital security and the opportunity to capture growth and, in many cases, receive a minimum return if the expected growth does not occur, is a compelling proposition.
Typical clients include expatriates, who are happy to safely lock away a fixed amount of their savings for a set period of time while they are working abroad. The other major categories are local residents or long-term residents overseas who can invest and take comfort from the guarantee element.
Investors seek a potential growth product with a minimum return that is at least higher than the interest return they are receiving on deposits. This remains the fundamental attraction of such schemes. The customer recognises the value in this product and, importantly, also appreciates the value of trust as well.
Major banking organisations have an advantage in this regard. With all the ongoing investigations into certain fund companies, clients are drawn towards familiar and trusted institutions that provide these products. The choice of provider is then a question of the terms of the scheme, the appeal of the investment and the timing. The fact that each product launch is available for only a limited period will always have an impact on the take up from clients.
One of the crucial tasks for the providers is first of all to make the terms appealing and, secondly, to ensure that potential clients are aware of the limited time frame of the offer.
The market is not an easy one to predict but the competition is such that those products which do not offer good value will certainly struggle to attract funds. However, the very nature and uncertainty of the financial markets means that the demand for capital protected type products is very much here to stay. Our recent offerings continue to attract significant investment levels. The market continues to see regular launches of schemes and the client has plenty of choice.
Market competition has widened the appeal of protected products and many advisers see them as a key element to investment portfolios.
Protected schemes have adapted considerably well to changing market conditions.
The use of capital protection schemes is a good way to introduce cautious customers to the market with minimal risk.
Head of UK intermediary distribution
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