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."

Have you tried new the Independent Digital Edition apps?
Life and Style
ebookNow available in paperback
ebookA delicious collection of 50 meaty main courses
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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


ES Rentals

    iJobs Job Widget
    iJobs General

    The Richmond Fellowship: Executive Director

    £66,192 per annum including car allowance of £5,700): The Richmond Fellowship:...

    Recruitment Genius: Customer Service Advisor

    £16575 - £19000 per annum: Recruitment Genius: An excellent opportunity is ava...

    Recruitment Genius: Office Junior

    £18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

    Recruitment Genius: Assistant Site Agent

    £22000 - £30000 per annum: Recruitment Genius: This traditional family company...

    Day In a Page

    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones
    Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

    Why are we addicted to theme parks?

    Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
    Tourism in Iran: The country will soon be opening up again after years of isolation

    Iran is opening up again to tourists

    After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
    10 best PS4 games

    10 best PS4 games

    Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
    Transfer window: Ten things we learnt

    Ten things we learnt from the transfer window

    Record-breaking spending shows FFP restraint no longer applies
    Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

    ‘Can we really just turn away?’

    Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
    Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

    Nine of Syria and Iraq's 10 world heritage sites are in danger...

    ... and not just because of Isis vandalism
    Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

    Girl on a Plane

    An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent