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Guaranteed facts

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We need hard figures in the debate over GEBs

There is nothing like a good spat to liven up the industry and if the Investment Management Association intended to wind up the Structured Products Associa- tion with some research on guaranteed equity bonds, then it worked a treat.

Apparently, the UKSPA was “shocked” by the IMA’s “flawed” research which suggests that investors were better off ploughing their money into tracker funds rather than a structured product.

In case you did not see the research, the IMA compared the investment returns of tracker funds and National Savings & Investments guar-anteed equity bonds and then revealed that in nine out of 10 cases, investors would have received higher returns from a tracker fund than from a GEB (which it stated was a form of structured product).

By looking at the 10 NS&I GEB issues that have matured to date, an investor would have gained an average of £1,933 in each of the nine years the tracker fund outperformed and would have lost only £449 the one year the tracker fund underperformed the GEB.

It is not the first time the IMA has published such res-earch suggesting that NS&I has “misled” the public by professing that the products “play the stockmarket without risking a penny”. The IMA has an agenda, of course. If you could get the market returns without risking a penny, it would be a no-brainer - and where would that leave members, most of which deliver substandard performance?

But the IMA also makes a point. These bonds are hugely popular when investors’ nerves are jangling. The premise of guaranteed equity bonds is simple enough but the way they operate is complex and investors need to be aware of that - and of their limitations. Yet people in the structured product industry appear to be sensitive souls and its trade association jumped on the research for daring to criticise its products.

Funnily enough, NS&I, which the research was squarely aimed at, were unfazed. It simply retorted that despite the fact that returns for previous GEB issues had been lower than anticipated, customers bene- fited from the 100 per cent capital security provided by its GEBs. It makes a fair point.

But back to the UKSPA. In its hastily published press release, it wondered why the IMA chose not to compare the returns against any of its members’ active managed funds. It reck-ons that the likely impact of fees and charges against the often mentioned “lost dividends” would have been a much more relevant piece of research for an association such as the IMA to produce for its members.

So I put a call into the PR company representing the UKSPA and asked it to come up with some stats to back up its argument and rubbish the IMA research.
Initially, it agreed but then it backtracked. Apparently, it started working on research but stopped because it was worried that it would be committing the same sin as the IMA by “comparing apples with oranges and devising really terrible research to prove an irrelevant point”.

It then went on that no one cared too much for a battle between trade associations. It was some climbdown from its original rant. The UKSPA now wants a debate with advisers and discretionary managers about the pros and cons of structured products. Fair enough, but some hard figures backing their arguments would be sure to liven up the proceedings.

Paul Farrow is personal finance editor of the Telegraph Media Group

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