Tax-Free Savings Survey: Protection - is it a racket?

Investments in protected funds have shot up. But are they really performing? By James Moore

Protected funds have become one of the investment success stories of the 1990s. Huge numbers of people have sunk cash into them because they offer exposure to the stockmarket and the potential gains that can bring, linked to guarantees that capital will be protected.

Savings rates, by contrast, are only just beating inflation as Bank of England base rates have fallen to all-time lows and returns from with- profits policies are also on the slide.

But despite this, financial advisers are highly sceptical of protected funds, arguing many of the people who have invested in them would have been much better off with non-protected funds.

Research conducted by Standard and Poors Micropal shows investors in 12 popular protected funds are losing out badly compared to those willing to accept a little more risk.

Comparing their performance to similar funds investing in similar areas over one year, they are close to the bottom of league tables. The three- year performance is better, but not by much.

Protected funds can be unit trusts, Open Ended Investment Companies (Oeics), offshore funds available as part of tax-efficient offshore bonds, or available as part of a pension plan. Some, though not all, can be held as Individual Savings Accounts (ISAs).

They come in two main types. Protected equity funds are similar to traditional unit trust or Oeic funds. They invest in shares or bonds but unlike their non-protected counterparts, the unit price in the fund cannot fall below a certain level, the protected price.

The level of protection is typically between 95 and 100 per cent. The protection is achieved by buying financial instruments called derivatives, which effectively provide insurance if the market falls. The protected period usually works over 12 months and units can be encashed at any time. If the market rises strongly the protected price can sometimes be increased.

Quarterly rolling funds offer a protected period of three months. At the end of this period the minimum price is reset but funds invested in them can not be accessed over the protected period without risking the guarantee.

The majority of the investment is held in cash, to provide the protection. In this type of fund the link to the stockmarket comes from using a different type of derivative. These types of funds cannot be placed in ISAs because of their predominantly cash-based component.

Companies offering protected equity funds include Scottish Widows, with its UK Sheltered Growth fund and Edinburgh Fund Managers, with its Safety First fund. They can be accessed through an ISA and either track a stockmarket index or be "actively managed", aiming to beat an index.

Examples of quarterly rolling funds are the Close UK Escalator 100 and 95 funds and NatWest's Safeguard fund. They usually track a stockmarket index such as the FTSE 100.

Both types are suffering disadvantages, ironically caused by the very economic conditions which have hit savings and with-profits returns and made them popular.

Low rates mean quarterly rolling funds have to keep more money on deposit leaving less to be used to purchase the stockmarket link, while current choppy markets and uncertainty about how they will perform mean the derivatives protected equity funds buy have become more expensive, hitting performance. Some protected products, such as those operated by Legal & General and Barclays B2, have closed to new business as a result.

Nonetheless the amount of cash invested in protected funds has shot up over the last five years. In 1994 the Association of Unit Trusts and Investment Funds identified one fund, which had pounds 18.6m invested.

Independent financial adviser Amanda Davidson, a partner with Holden Meehan, says: "These funds can be useful but you have to understand what you are giving up. You can miss out on a lot of growth. They are really for cautious investors, or for a cautious part of a portfolio. And capital is not totally protected. Even in 100 per cent protected funds you could still lose out on inflation."

Arts and Entertainment
Characters in the new series are based on real people, say its creators, unlike Arya and Clegane the Dog in ‘Game of Thrones’
tv'The Last Kingdom' embraces politics, religion, warfare, courage, love and loyalty, say creators
Sport
Sergio Romero saves Wesley Sneijder's penalty
world cup 2014But after defeating the Dutch, Lionel Messi and Argentina will walk out at the Maracana on Sunday as underdogs against Germany
Sport
Scoreboard at the end of the semi-final World Cup match between Brazil and Germany at The Mineirao Stadium in Belo Horizonte
Sport
'Saddest man in Brazil' takes defeat with good grace, handing replica trophy to German fans
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Life and Style
ebookA wonderful selection of salads, starters and mains featuring venison, grouse and other game
News
peopleThe Game of Thrones author said speculation about his health and death was 'offensive'
Arts and Entertainment
Martin Freeman and Lauren O'Neil in Jamie Lloyd's Richard III
theatreReview: The monarch's malign magnetism and diabolic effrontery aren’t felt
News
Glamour magazine hosts a yoga class with Yogalosophy author Mandy Ingber on June 10, 2013 in New York City.
newsFather Padraig O'Baoill said the exercise was 'unsavoury' in a weekly parish newsletter
Extras
indybest
News
people'She is unstoppable', says Jean Paul Gaultier at Paris show
Sport
Alexis Sanchez and apparently his barber Carlos Moles in Barcelona today
football
Arts and Entertainment
Miley Cyrus has her magic LSD brain stolen in this crazy video produced with The Flaming Lips
video
Arts and Entertainment
In his own words: Oscar Wilde in 1882
theatreNew play by the Oscar Wilde's grandson reveals what the Irish wit said at his trials - and what they reveal about the man
News
people
Arts and Entertainment
Unless films such as Guardians of the Galaxy, pictured, can buck the trend, this summer could be the first in 13 years that not a single Hollywood blockbuster takes $300m
filmWith US films earning record-breaking amounts at the Chinese box office, Hollywood is more than happy to take its lead from its new-found Asian audience
News
The garage was up for sale in Canning Place Mews for £500,000
newsGarage for sale for £500,000
Life and Style
tech
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs General

    Mobile App/IOS Developer (C#, ASP.NET, .NET, MVC)

    £50000 - £60000 per annum + Benefits + Bonus: Harrington Starr: Mobile App/IOS...

    Front End Developer-JavaScript, Angular J.S, HTML, CSS, ASP.NET

    £40000 - £45000 per annum + Benefits + Bonus: Harrington Starr: Front End Deve...

    Associate CXL Consultant

    £40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

    Associate CXL Consultant

    £40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

    Day In a Page

    The true Gaza back-story that the Israelis aren’t telling this week

    The true Gaza back-story that the Israelis aren’t telling this week

    A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
    A History of the First World War in 100 Moments: The German people demand an end to the fighting

    A History of the First World War in 100 Moments

    The German people demand an end to the fighting
    New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

    New play reveals what Oscar Wilde said at trials

    For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
    Can scientists save the world's sea life from

    Can scientists save our sea life?

    By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
    Hollywood targets Asian audiences as US films enjoy record-breaking run at Chinese box office

    Hollywood targets Asian audiences

    The world's second biggest movie market is fast becoming the Hollywood studios' most crucial
    Grindr founder Joel Simkhai: 'I've found love on my dating app - and my mum keeps trying to hook me up!'

    Grindr founder Joel Simkhai: 'I've found love on my dating app'

    Five years on from its launch and Grindr is the world's most popular dating app for gay men. Its founder Joel Simkhai answers his critics, describes his isolation as a child
    Autocorrect has its uses but it can go rogue with embarrassing results - so is it time to ditch it?

    Is it time to ditch autocorrect?

    Matthew J X Malady persuaded friends to message manually instead, but failed to factor in fat fingers and drunk texting
    Westminster’s dark secret: Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together

    Westminster’s dark secret

    Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together
    A History of the First World War in 100 Moments: Dulce et decorum est - a life cut short for a poet whose work achieved immortality

    A History of the First World War in 100 Moments

    Dulce et decorum est: a life cut short for a poet whose work achieved immortality
    Google tells popular music website to censor album cover art in 'sexually explicit content' ban

    Naked censorship?

    The strange case of Google, the music website and the nudity take-down requests
    Howzat! 8 best cricket bats

    Howzat! 8 best cricket bats

    As England take on India at Trent Bridge, here is our pick of the high-performing bats to help you up your run-count this summer 
    Brazil vs Germany World Cup 2014 comment: David Luiz falls from leader figure to symbol of national humiliation

    David Luiz falls from leader figure to symbol of national humiliation

    Captain appears to give up as shocking 7-1 World Cup semi-final defeat threatens ramifications in Brazil