After a long period from 2003 when almost every investment seemed to make money, the credit crunch has suddenly made life much harder.
Sectors that were once one-way bets, such as commercial property, have floundered, while rising equity volatility – the CBOE Vix index, a snapshot of how much share prices are bouncing around, ended the year at 22 from just 12 in January – has left many equity investors “trying to prise out some over-arching narrative that makes sense of things when there may not be one”, as David Stevenson put it in the FT.
In such uncertain conditions, the instinctive reaction is to invest defensively. Sounds good, but in practice what can you invest in that will protect your capital as far as possible without simultaneously sacrificing all hope of a decent return?
The good news is that there are products that can help. If your objective for the next few years is to earn a fairly safe return that beats the rate you could get by opening an online account with the likes of Sainsbury’s, and are willing to accept the risk that you could lose some, or all, of your capital (although global stockmarkets would have to go into meltdown for this to happen), two options are zero-dividend preference shares issued by split-capital investment trusts, and structured products.
Split-cap zeros
The tarnished history of some split-capital investment trusts, which went belly up in the early part of the decade due to a disastrous strategy of borrowing heavily and then using the money to invest in each other, is well documented. But this shouldn’t put you off the sector. At SplitsOnline you can view a selection of listed trusts that have issued zeros. These shares don’t pay any income – the return comes purely from the capital gain when the trust is wound up.
Using the site you should check the yield on offer, the amount of time remaining until redemption, and the ‘share cover’. The latter is a safety measure indicating the number of times the gross assets held by the fund, adjusted for charges and fees, cover the expected redemption payout.
From this list, Stevenson likes Real Estate Opportunities, a “high-quality outfit”. We are more circumspect. Although the share cover is generous, the trust is invested in property both here and in Ireland, a sector that we feel is at risk of more big batterings before the trust is wound up in 2011. An alternative, with a mixed exposure to utility, infrastructure and renewable energy projects, is Utilico (LSE:UTLB), offering a decent yield of over 7%, assuming redemption occurs in 2014.
Structured products
There aren’t many splits that cut the mustard, which might tempt investors to look for a similar alternative. Société Générale offers just such a product, the intimidating sounding “Dow Jones 50 7.5% zero coupon certificate”. Details are available at their website, under “structured products”, with code SG22. The idea is that you buy the certificates now – the current price is around £1,060 – in the hope of getting a fixed payment of £1,543 in 2012, equating to an annual return of just below 8%.
There is a catch – should the Dow Jones Eurostoxx 50 large-cap companies perform badly enough in the interim to drag the index below 2,402, then on expiry you lose a portion of the certificate’s “par” value of £1,000. Were it to close at 2,002 or lower, for example, you would only get £500 back per certificate. But with the index sitting at well over 4,000 points today, there’s a pretty big buffer between you and any serious losses. It’s also worth noting that this product is free of stamp duty and is Sipp-eligible.
Don’t forget to use your shareholder perks
Most people rightly buy shares for two reasons – the prospect of receiving dividend income and the hope of making a capital gain. For a minority, the right to attend and vote at an annual general meeting also holds some allure, especially if, as is the case at Tesco, there’s a small gift (such as a bottle of wine) up for grabs. But according to Barclays Stockbrokers, investors are missing out on other perks too, largely because they don’t know about them. Signet’s shareholders, for example, are entitled to 10% off purchases at Ernest Jones and H Samuel.
Meanwhile, according to The Times, BA plans to repeat its offer of 10% off all flights from the UK for a shareholder and up to five friends, provided you own at least 200 shares (currently valued at around £580). So, check your entitlements – see the shareholder benefits section of Hargreaves Lansdowne’s website, or contact your broker.