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Firmer foundations for structured plans

With world stockmarkets still extremely fragile and the downturn

having been far longer and more severe than many thought possible, no

one seems keen to commit to when they think the upturn will begin.

There are probably very few fund managers or IFAs who have ever

worked at a time when markets have been so depressed.

With the tax year end almost upon us, the lack of good news will no

doubt make this another difficult time. This is not helped by George

Bush and Tony Blair not addressing the worsening economic conditions

in the US and UK but instead concentrating on the situation in Iraq.

Yet the uncertainty that the Iraq saga has created, along with more

fundamental economic issues, means we may now have in place the ideal

scenario for structured investment products to flourish.

These plans have been on the receiving end of a significant amount of

bad press over recent months, with the FSA having referred to them as

“precipice bonds”. It is predicted that a number of plans will

realise significant capital losses if stockmarkets remain at their

current levels. The main drive seems to be that this was not made

clear at the time the contract was taken out. While I cannot

categorically say this is untrue, most, if not all, literature makes

the risks clear.

These bonds are designed so that they are intrinsically linked to the

markets and will only reflect the underlying economic situation at

any time.

Actively managed funds can move to cash but the majority will not for

fear of underperforming their peers or moving too far away from the

benchmark for the sector. This means that nearly all equity-based

investments will track the market up and down. Therefore, the

Government&#39s apparent lack of concern regarding the collapse of

markets and the effect this is having on the people of this country,

be it through savings, pensions or jobs, is worrying.

Having said all the above, the consensus still seems to be that

equities will remain the place to be over the long term. With markets

at current levels and most fund managers sounding caution as to

future levels of growth, this may provide a perfect climate for

structured investments.

A recent paper issued by the London Business School, with ABN Amro,

suggested that it could take until 2018 for markets to recover to

their 2000 levels. While most of us hope this is far too pessimistic,

structured plans can be designed to provide growth in most scenarios

and may offer the opportunity to outperform equities significantly in

the coming years.

True, certain concerns still remain that these investments are risky.

I would, however, hope that this idea has finally been laid to rest

with the Government entering the market last year via National

Savings.

Recent press comment on these plans has missed the fundamental

issues. Structured plans are equity-based investments where the

overall return – capital and income – must be taken into account.

Furthermore, their performance needs to be compared with other

equity-based investments.

Hopefully, as people grow to accept that these investments offer

excellent opportunities, they will embark on a process of education,

reviewing the plans available on their individual merits and using

them accordingly. The first and probably most important issue is that

they are equity-based investments and, therefore, carry the risks

that are attached to any equity-based planning.

There are currently a number of plans on the market offering a fixed

return, provided markets do not fall from their current levels by

more than 50 per cent, that will give up to two or three times the

growth in the FTSE or other index, with growth capped at between 75

and 100 per cent. Everyone seems to agree that equity investments are

in for a bumpy ride and a period of slow growth, so surely these

plans offer excellent opportunities for all concerned?

The one area where structured investments have yet to be accepted is

by pension fund trustees. This is quite ironic when you consider

that, unlike most investors, they can categorically commit to invest

for a period of, say, five years, safe in the knowledge that funds

will not be required. The income version of structured investments

can provide higher levels of income for pension purposes than are

available elsewhere, while growth options will enable gearing on the

upside of any growth. Unless the trustees want to remain totally out

of equity markets, structured investments offer opportunities

compared with other investment classes.

While no one would wish to hide the past, nearly all these plans were

bought by willing investors on the basis that markets would not or

could not fall below the safety thresholds set. We all now know that

this has not been the case. Hindsight is a wonderful thing.

These plans still need to be fully understood before being bought –

hence the need for independent advice. But they do offer some

exciting opportunities to make a healthy return in today&#39s difficult

climate.

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