IMA CRITICISES "COMPLICATED AND OPAQUE" NS&I GUARANTEED EQUITY BONDS - CONSUMERS BEING "MISLED"

In its response to the European Commission's Call for Evidence on product transparency and distribution requirements for "substitute" retail investment products, the Investment Management Association (IMA) draws particular attention to the performance of the first three issues of "guaranteed equity bonds" by National Savings and Investments (NS&I).

The products are described as offering "stock market growth potential with no risk to your capital". The NS&I web site says that "thousands of investors are playing the stock market without risking a penny" by buying these products.   IMA's research indicates that these claims should not be taken at face value.

IMA compared the value after 5 years of the first three issues, which have now matured, with the performance of three leading UK index tracking funds over the same periods.  In all cases, for a basic rate taxpayer, the GEBs underperformed the index trackers by between 2.9 and 3.7 per cent a year, as demonstrated in the table below.  The cumulative difference over 5 years varied between 15 and 20 per cent.

After taking account of charges, tax and other differences between the products, the annual difference in performance between GEBs and the market approaches the 4 to 5 per cent that most economists believe to be the "equity risk premium", the extra returns that will be earned over time from true stock market investments as compared with risk-free investments like gilts.  In other words, the returns from these GEBs can be expected over time to be much closer to such risk free investments than to the stock market. 

Richard Saunders, IMA Chief Executive, said:

"These findings are very significant.  These products have been widely promoted in recent years as a risk-free way of getting a stock market-related return.  In fact they offer the first but not the second.  Instead, they appear to be simply a complicated and opaque way of delivering the same returns over time as a good deposit account.

"It is quite wrong that consumers should be misled in this way.  We therefore welcome the European Commission's determination to open up this whole area for examination."

-ENDS-

Notes to Editors

1. The IMA is the trade body for the UK's £3,100 billion asset management industry. The money its members manage is in a wide variety of investment vehicles including authorised investment funds, pension funds and stocks and shares ISAs. Its role is to represent the industry and promote high standards

2. The IMA response to the EU consultation is available here.

3. Guaranteed equity bonds are based on products offered by a number of retail banks. The IMA has no data about the performance of bank products. Information on the NS&I web site may be found at http://www.nsandi.com/products/geb/index.jsp.

4. The following table compares the performance of the first three issues of NS&I GEBs with the average of the three largest index trackers.

All figures after payment of basic rate tax
Sources:  NS&I, Lipper

For further information, please contact:
Noreen Shah, Communications Officer, IMA, 020 7831 0898