Trade punches

21 April 2011 | By Chris Salih

Research from the Investment Management Association comparing index trackers with National Savings and Investments guaran-teed equity bonds has triggered an angry resp-onse from structured product providers.

Last week, the IMA published a research document highlighting the fact that tracker funds had outperformed guaranteed equity bonds issued by NS&I since 2002 in nine out of 10 cases. The IMA says the research “lays bare” the reality of many structured products which “conceal high costs, hidden risks and uncertain returns”.

The UK Structured Products Association has attacked what it describes as “flawed” research.

For the 10 NS&I GEB issues that have matured to date, a £10,000 invest-ment would have gained an average of £1,933 in each of the nine years that tracker funds outperformed and would have lost £449 the year tracker funds under-performed the GEB.

The IMA research sugg-ests a basic-rate taxpayer in a tracker fund would have got, on average, £1,695 more in returns than an investor in a NS&I GEB while a higher-rate tax-payer would have gained an average of £1,827 more.

The research also suggests that NS&I GEB investors have lost out on an average of £2,360 in dividends across the 10 GEBs that have matured to date.

NS&I GEBs offer returns linked to the FTSE 100 index, with a guarantee of a full return over the five-year term.

The IMA says its research focused on the NS&I prod-ucts as it is the only body which is transparent about the returns that investors get from GEBs that have matured.

IMA chief executive Richard Saunders says the research highlights some of the realities of structured products. He says: “In the case of guaranteed equity bonds, investors paid large sums of money for protection against a contingency that arises relatively rarely, with the cost out of all proportion with the benefit received. With investment products, there is no substitute for simplicity and trans-parency, these are the standards that regulators need to adopt in over-seeing the market.”

NS&I retail customer director John Prout says its customers are looking for the safety offered by the product guarantee.

He says: “Since the start of the credit crunch in 2007, there have been sharp falls in the FTSE 100 index due to events in the banking sector and the wider economy. Despite the recent recovery, as the index end levels were lower than the index start levels and since the return on our GEB is determined by the average closing level of the index over the final six months of the investment term, the returns provided to inves-tors of GEB issues seven, eight, nine and 10 were lower than when the index was at its peak.”

UKSPA spokesman James Harrington says the IMA was “unfair and potentially misleading” in choosing to compare a Government-backed deposit with a direct equity-invested collective.

It also questions the IMA’s view that it used NS&I as the example in its calculations because it is the only structured product body which is transparent about returns. He says the UKSPA has never been asked for data to review maturities by the IMA and would have supplied it if asked to do so. It says the paper makes a number of flawed assumptions on struc-tured deposits, such as the fact it states that GEBs are sold on the basis that there are no fees and charges.

Harrington says: “The contents of a poorly constructed document that amazingly has the aim of giving a straight-forward comparison of tracker funds versus UK government-backed structured deposits shows a level of misun- derstanding that unfortunately simply goes to highlight a failure within the IMA rather than a failure of struc-tured investments or structured deposits.”

Chelsea Financial Services head of invest-ments Matthew Wood-bridge says: “It is not a fair comparison between GEB and tracker funds and it is clear that the IMA has its own agenda. It would have been a much fairer comparison if they had compared it with struc-tured product providers used by many advisers.”

But Michael Philips proprietor Michael Both says he agrees with the IMA’s stance. He says: “In an exchange traded fund or index tracker, you do receive a dividend so if there was 25 per cent of dividend available over a six-year period, which is not impossible, you could view that as a guarantee if the market fell 25 per cent. I have looked at a huge proportion of the GEB ilk and very few add significant value over buying an ETF and putting some money on deposit.”

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