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Guarantee gloss

In the next few weeks, financial advisers can expect calls from clients asking about an unusual investment that promises guaranteed returns of 6 per cent a year with unlimited upside.

You do not see the word guaranteed on many financial products nowadays because the FSA has forced providers to spell out the precise terms of any guarantee.

Since the small print reservations often cancel out the benefit or providing real benefits costs too much, providers have largely abandoned the term, even though they would all love to use it because they know if they do they will haul in vast subscriptions from a largely ignorant public, as structured products continue to do.

But these restrictions apply only to authorised products. Promoters have sought to create products that can take advantage of the magic word guarantee while remaining outside the scope of the FSA.

One of the most striking that I have seen is Capital Alternatives’ multi-asset guaranteed portfolio, which guarantees returns of up to 6 per cent a year from an investment divided equally between gold, property, fine wine and memorabilia, a combination that the firm claims has delivered an annual average return of just short of 15 per cent over the five years to the end of 2009.

The front cover of the brochure, which has been widely mailshotted, includes the statement: “A guaranteed return of 12 per cent over three years, 25 per cent over five years and 60 per cent over 10 years with capital guaranteed and unlimited upside potential.”

The elements within the product are “physicals” and hence non-regulated and because the investor is said to own each of them independently – not via a fund or pooled ownership – the glossy promotion for the multi-asset guaranteed portfolio looks as though it could escape the financial promotion rules.

The brochure lacks many of the details you might expect. It claims there are no management fees (other than a 3 per cent fee on sale of assets) but does not explain how investors purchase or own the assets, except to say they get a discount of 5 per cent on purchase and receive a certificate for each asset. The “100 per cent capital guarantee” and the annual return guarantee are provided by a private company which gives no information on its capital resources.

Capital Alternatives’ website has other investment offers, such as 3,000 acres of rice-growing land in Sierra Leone on a 49-year lease and diamond and gold mines.

Although such a scheme may not break any rules, my view about the multi-asset guaranteed portfolio promotion – as with land-bankers and off-plan flat sellers – is that if it walks like a duck and quacks like a duck, the FSA should get out its shotgun. It was slow to act against property promoters in 2006 but the FSA did, to its credit, manage to establish that many of the landbankers were operating unregulated collective investment schemes, and closed several down.

Also coming along is a variety of supposedly “green” investments in biofuels, alternative energy, agriculture and the like. One such promotion tells me a shrub that grows in Indonesia produces far more oil for biofuel than palm oil (itself starting to look like a bubble). It claims I can get over £8,000 back from a £20,000 investment within 18 months and expect to sell it for £60,000 within five years.

If the FSA is, as the Conservatives propose, to be converted into a consumer protection agency, it will need to quickly get a grip on this burgeoning sector, where the greenery could easily conceal nasty bugs.

Chris Gilchrist is director of Churchill Investments and editor of The IRS Report


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