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Farrow’s view

New products are coming that claim to beat deposit rates but they also have a high bafflement factor.

If Forrest Gump had designed financial
products, he would have probably taken on the “simple is as simple
does” format. Tony Blair would also have probably personally
commissioned him to come up with proposals on how to encourage the
masses to save.

Instead, the task fell to former Lloyd’s chief Ron Sandler and, in a
matter of months, his so-called suite of products will be on sale.

The nation needs products that are simple to understand. The complex
natures of with-profits funds, precipice bonds and split-capital
investment trusts have done plenty of damage to clients and IFAs. I
am sure that most IFAs yearn for products that clients can easily
digest and understand.

But if advisers thought that fund management groups were going to
follow the Forrest Gump principle, they may want to think again.
There are murmurings that this Isa season will see a raft of low-risk
products on the shelf aiming to deliver around 2 per cent more than
cash. It sounds like the perfect idea for clients who are still too
nervous to dip their toes back in today’s uncertain stockmarket

DWS has set the ball rolling with its Ratebuster fund – a fund that
has a potential return of 3-4 per cent above base rate. The marketing
buffs at DWS are no doubt applauding themselves for coming up with
the eye-catching name which it has proudly trademarked. The question
is whether IFAs will be able to understand it and explain it to

The press release tells us that Ratebuster is a better alternative to
savings accounts. The fund will be split into two parts.

The first of these is a money market portfolio which consists of high
credit quality deposits with a fixed six-month term.

The second component is the managed account which “encapsulates the
views of seven teams of investment professionals based around the
world who take views on currencies, interest rates and markets”.

I have to admit that I was a tad confused. What did all this mean?
“DWS uses a swap arrangement, an integrated alpha platform and will
use currency and duration strategies. It is betting on the yield
curve,” one IFA tells me. “I am not sure how I am going to explain
that to the client. It’s a Pandora’s box, a bloody nightmare.”

You are not kidding. The IFA is not alone. Hargreaves Lansdown
chairman Peter Hargreaves says he is “petrified” that it may not
deliver the goods while another adviser says he has a number of
questions he wants to raise.

Cash-plus funds are already big business in Europe. UBS, for
instance, offers two Luxemburg funds for investors on the Continent.
They invest in a mixture of corporate bonds and bond derivatives to
give a cash-plus return of 2 per cent.

UBS readily admits that the product is not simple to explain to
customers and for that reason it has no plans to launch similar funds
in the UK any day soon. “The UK is one of our greatest worries,” it

On the face of it, the DWS product looks attractive. The capital is
guaranteed every six months (although a default by one of the money
market counter parties could put it at risk) and, if the product goes
according to plan, it will return 3 per cent above base rate, paying
6.2 per cent net a year after charges, comf-ortably beating National
Savings index-linked certificates which pay around 4.65 per cent
after tax.

As DWS asks, does this sound too good to be true? Forgive me for
being cynical but yes it does. It is not that long ago that fund
managers were telling us that zeros were bullet-proof and, given the
track record of the financial services industry, it is debatable why
anyone should trust providers again. This is not to say that the
Ratebuster will not deliver the goods but I am yet to be convinced
that it is the answer to Joe Public’s prayers.

DWS insists it will make people aware that interest can be lost every
six months. It also reckons that IFAs will be fully educated by the
time the fund is launched in March.

The problem is that I am not sure that someone looking for the next
step away from deposit accounts should be faced with a baffling array
of phrases such as “currency bets” and derivatives”.

Besides, basic-rate taxpayers wanting to take no risk whatsoever can
get 4 per cent net with ING’s instant access savings account or 4.3
per cent with Alliance & Leicester’s current account.

DWS and other would-be cash plus providers cannot blame IFAs if they
shun these products because they struggle to understand fully how the
funds work. If they did not, that would be stupid and we know what
Forrest Gump would say to that.

Paul Farrow is a personal finance reporter at The Sunday



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