A safe road to market for nervous investors: Christine Stopp examines a bond which removes the risk from equity holdings
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Your support makes all the difference.LAURENTIAN's Capital Protected Bond, launched this week, aims to provide security for the many stock market investors whose confidence has been further dented by the latest interest-rate gyrations.
The bond offers a chance to get stock market performance with a no-loss promise. It has a pounds 5,000 minimum investment and offers a triple guarantee: you receive 115 per cent of any gain in the FT-SE 100 index over the five-year term; if there is no gain, your original investment is refunded; and if you die during the term, your original capital is returned.
Laurentian uses a combination of options and zero coupon bonds to achieve these apparently magical results. As with a guaranteed income bond, the charges are built in; there are no declared front-end or annual management charges. Nor can the investor follow the progress of the bond. It is simply a 'buy and forget about' investment which delivers the goods at the end of the term.
The downside is that you are stuck with the bond for the whole term unless you are prepared to take a loss on early surrender.
Most capital-protected plans show a depressed return if equity markets rise, because the cost of providing the guarantee eats into investment performance. The Laurentian plan gets round this by promising 115 per cent of stock market growth over five years.
The first capital-protected plans appeared in 1989 in response to growing investor resistance to the uncertainties of the stock market. A Cazenove fund based on the Japanese market was particularly well timed, returning growth of 9 per cent over three years, despite a 50 per cent fall in the market. A one-year plan linked to the US market is now on offer.
Capital-protected plans have not exactly boomed, though currently they account for an estimated pounds 300m of investors' money. They are hard to set up because of the complexity of the investment mechanisms involved. Most rely on a fixed- term arrangement to provide the guarantee, so are only available for a limited period.
The plans vary from company to company. Some are linked to 100 per cent of the growth of the index, while others are not index-linked. Some allow the guarantee level to be stepped up if markets rise. A recent fund from Hypo Foreign & Colonial rolls up and secures market gains each quarter.
Investment terms also vary. The Scottish Provident Capital Guarantee Bond gives a money-back promise over three years.
The plans are designed to woo a sceptical public back into equities. Recent research by Laurentian showed that only 27 per cent of adults thought the stock market was better than a building society over a 20-year term. In fact, pounds 100 invested in the FT-SE 100 in 1972 would have been worth pounds 1,046 by 1992. A similar investment in a society would have grown to pounds 457.
Laurentian's bond is on offer for two months from 1 October.
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