Newspaper article The Journal (Newcastle, England)

Best of Both Worlds from Structured Investments

Newspaper article The Journal (Newcastle, England)

Best of Both Worlds from Structured Investments

Article excerpt

Byline: Ian Lowes

THE good news from the Office of National Statistics this month is that the Retail Prices Index (RPI) in June was down to 5% from 5.2% in May. The bad news, of course, is that it is at 5%.

Between 1985 and 2010, the RPI increased at an average rate of 3.4%. So in 2011 we have inflation above the average. With traditional inflation-proofing investments delivering below-inflation returns, this creates a dilemma for investors who are looking for growth but are unwilling to take greater risks with their capital.

Index-linked National Savings Certificates have been stalwarts in the fight against inflation in the past, but were withdrawn from the market in July 2010 and only relaunched in May. Not surprisingly, demand was very high, but for a five-year term paying just 0.5 per cent above the RPI with a maximum investment per person capped at pounds 15,000, terms are not as good as previous issues.

Corporate bonds have been another means of generating yields above inflation, although one-year performance figures show many are barely scraping above inflation. High-yield bonds and emerging market bonds are better performers, but these come with higher risks attached. And, of course, yields fluctuate so there is no guarantee they will beat inflation over five years.

Commercial property has been another mainstay investment in the past, but property prices and rental yields, perhaps with the exception of London, have been flat or falling in 2011.

Gold has risen massively in recent years - it is now over pounds 1000 an ounce - and if global economic uncertainty continues it could rise further. However, the market seems to have many people believing we are in a "gold bubble" and the commodity is near or above its peak price.

Finally, the stock market has been volatile in 2011, dogged by a steady and, it seems, ongoing flow of bad economic news coming from the US, China, Europe and elsewhere, creating uncertainty over the global economy that looks set to be with us for some time.

Well, almost finally, one strategy that is often overlooked as a means of potentially achieving inflationbeating returns is the use of structured investments. These contracts usually last five or six years and offer a set rate of return if a stock market, such as the FTSE 100, is at or above the level it started at in year one. An investor buying a structured investment that offers a defined return of, say, 60% after six years if the FTSE is above where it is now, gives the investor a good potential margin on inflation.

Should the underlying stock market fall, then most structured investments will protect capital either at 100% or until the stock market drops more than 50%, preserving original capital to that point. …

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