View more on these topics

Defaqto on Morgan Stanley IQ’s UK Inflation-Linked Income Plan 2

View of Defaqto insight analyst for funds Fraser Donaldson

Donaldson says: “This product is aimed at investors who require income, and want this income protected against inflation. There must also be a belief that the UK market as measured by the FTSE 100 index will not fall by 50 per cent over the next five years.

“If the index falls, but not by more than 50 per cent, full capital will be returned at the end of the term. If the index falls by more than 50 per cent, capital will be returned on one for one basis – for example,  if the index falls by 55 per cent return will be 45 per cent of original capital. As long as the index does not close at the end of the term at a lower level than at the start of the term the original capital will be returned in full.

“The only other risk associated with this product is the counterparty. If the counterparty becomes insolvent before the end of the term the original investment will be lost. In this instance the counterparty is Morgan Stanley International the counterparty.

“In these times of volatile markets and very low returns on cash, this may be appealing to income investors. With the RPI currently reaching 5 per cent and showing no immediate signs of falling back, these returns are looking attractive.

“The irony of the plan is that the more income that is paid out the higher the inflation rate is and the less real value the original capital will have. However, as income is paid out at 1.5 times inflation, this will be seen as adequate reward for any real drop in capital. It is here that the adviser and client need to way up the pros and cons.

“One thing to note though is that although returns are linked to the FTSE 100 index, it should not be considered an investment in the UK from a portfolio construction point of view.  If there is one outcome that is highly unlikely, it is that the return on maturity will reflect the return on the UK FTSE 100 index.

Recommended

Core strength

Last week’s bailout deal for Greece was not a solution to the eurozone debt crisis. It was simply a debt devaluation – and, no doubt, it will be the first of many. Debt devalua-tions are necessary to provide fiscal relief but they do not improve competitiveness. Supply-side reforms are essential. While there have been important […]

Back, but not by popular demand

The securitisation market is slowly being rehabilitated as a reliable source of funds for mortgage lending but as many investors had their fingers burnt once before, will there be sufficient appetite for it? Rachael Adams reports

First State opens door on Australian equities to UK investors

First State Investments has created a Dublin-based fund that invests in Australian equities. As the name suggests, the Australian growth fund aims for growth by investing mainly in big Australian companies. It can also invest in companies elsewhere that have their main business activities in Australia. The portfolio is concentrated, typically holding 25-50 companies with […]

Govt under pressure ahead of GDP announcement

Chancellor George Osborne could face pressure to ease Government cuts later today if official growth figures fail to show signs of recovery. Economists are predicting the Office for National Statistics will announce growth figures of around 0.2 per cent for the second quarter of 2011, although some have suggested the figure could be negative. The […]

HMRC helping to remove artificial gains

An investment bond offers investors certain tax advantages, one of which is the ability to take partial surrenders from the investment. This facility allows the policyholder to withdraw amounts up to 5% of the amount invested each policy year on a tax deferred basis, without incurring any immediate tax liability. This tax deferred allowance can […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com