The phrase ‘guaranteed equity bond’ (GEB) sounds so reassuring. The word ‘bond’ implies safety. Adding a guarantee makes it seem doubly secure. Throw in a link to equities and investors might think they’re on to a win-win: a product offering the upside of equities with little of the downside. But the alluring jargon conceals problems.
First, the upside often isn’t that great. GEBs typically offer just a percentage of the rise in the stockmarket over a fixed term with no dividends. For example, although many investors like the security of National Savings & Investments (NS&I) products, its latest GEB only offers 35% of the rise in the FTSE 100 over five years, or your capital back if it falls. Meanwhile, the Alliance & Leicester (A&L) guaranteed capital plus product offers a minimum 0.5%, and up to 11% of the FTSE 100’s growth over 3.75 years, or between 1% and 30% over 5.5 years. So it manages to be stingy and complicated at the same time.
In any case, if you’re bullish on equities, why not just buy, say, a FTSE 100 exchange-traded fund and enjoy the full rise in the index plus dividends? You’ll also pay less in fees and enjoy the flexibility of being able to get out anytime you choose rather than being locked in for, say, five years. Sure, there’s no guarantee you’ll get your original capital back. But then, as customers who bought supposedly safe products backed by Lehman Brothers found out after it collapsed, some GEBs may not return your capital either. Worse, the Financial Services Compensation Scheme won’t pay up where Lehman-backed GEBs were bought through a separate plan provider.
Even ignoring this risk, the return of just your original capital (NS&I) plus, say, 0.5% (A&L) isn’t such a great deal if inflation takes off. At just 2% a year, for example, the value of £100 in three years’ time is reduced to £94.25 in inflation-adjusted terms.
So with the prospect of interest rates rising as inflation goes up, there are “probably some better options out there”, even for the safety-conscious investor, says Danny Cox at Hargreaves Lansdown in The Scotsman. For example, Barclays has just launched a savings bond paying 4.25% for three years, while India’s ICICI Bank UK is offering up to 4.4%, depending on the term. Meanwhile, the best regular savings account from Barclays pays 5.84% on monthly deposits of up to £250.