It looks as though 2009 is set to be a year of real market uncertainty. The UK base rate has just dropped to 0.5%, it’s lowest ever level over its 315 year history. Equity market volatility looks certain to remain high and the property markets, both residential and commercial, are showing little sign of recovery. Commodities are under severe pressure and probably the less said of hedge funds the better. So the big question is “where and when to invest in 2009”?

The general feeling within the investment industry at the moment is that the current depressed levels of the FTSE100 Index would appear to offer excellent buying opportunities. However, whilst this view is voiced by individuals from within the industry, I am not so confident that the majority of investors share this sentiment. What is also worth noting is the high level of volatility still inherent within the FTSE100 Index. At the time of writing, implied 1 year FTSE100 Index volatility is around the 35 mark indicating that although the FTSE100 Index spot levels are historically low, the market is still expecting substantial swings either way on the value of the UK’s top 100 companies. So, whilst the FTSE100 Index may indeed have bottomed out, now is not the time to be complacent.

Given the current investment climate, I was quite surprised to read recently that retail sales for tracker funds hit a 6 year high in the final 3 months of 2008, as reported by the Investment Management Association (IMA). Sales recorded a net inflow of some £280m in Q4, compared with an outflow of £33m during the previous quarter.

Many clients are more comfortable moving back into equity investments however their expectations from such investments will vary immensely. The general consensus is that a return of somewhere around 8-12% per annum seems the norm. As many of you will already be aware, equity returns are made up of 3 main component parts; dividends (currently around 5%), inflation (lets say 2%) and an equity risk premium (lets say around 3%), so somewhere between 8-12% makes intuitive sense. In simple terms, the market expects an equilibrium return of around 8-12% for UK equity investments over the medium to long-term (defined as 5 years plus). Taking a crude Is now the time to invest in the markets?average for the purposes of this commentary, I will assume an expected return of 10% pa.

Volatility next and this is an interesting topic as I would imagine that very few advisors are talking about volatility in its purest sense simply because the numbers are so high as already mentioned above. Investors currently buying into equity funds will need to be prepared for a bumpy ride even given the current depressed levels of equity market indices and also mutual fund unit/share prices.

Having said that, because of the high levels of volatility across equity markets, there is, in my opinion, excellent value to be had in many capital-at-risk structured products. What I mean is that the market is prepared to pay significant premium where clients accept a certain amount of capital risk, or in other words, sell volatility.

One such product is the FTSE 100 Geared Returns Plan 7 from Investec Structured Products. This plan delivers 10 times the upside in the FTSE100 Index over a 5 year period with a maximum return of 100% growth. So, in other words, double your initial investment.

Given the assumption on an investor’s return expectations above, the cap of 100% on this product would not seem to be an issue especially given the soft protection available within the structure. This offers full capital protection provided the FTSE100 Index has not fallen by more than 50% throughout the investment term and not recovered by the maturity date. If the FTSE100 Index halves at any point during the Investment Term and the Final Index Level is below the Initial Level at the Plan Maturity Date, the investor’s initial investment is at risk on a one-for-one basis.

So how are these returns achieved? Well, in simple terms, by using a 50% knock-in barrier on the downside, clients are effectively selling volatility which, in the current climate, the market will pay significant premium for. Clients are then able to participate in highly geared returns over say a 5 year period whilst taking on less risk than they would buying a FTSE tracker or ETF because of the downside protection included within the product. Capital is only lost on a one for basis if the FTSE100 Index halves and fails to recover by maturity.

Traditional equity funds or trackers are simply unable to offer any alternative with a similar risk profile. So therefore, does it not make sense that where clients are prepared to take on market risk that advisors seek to deliver as much reward in upside performance as is possible from that investment? I would argue yes especially given the heavily depressed levels of the FTSE100 Index currently.

The answer to the question in the title would appear to be self evident, many investors do believe now is the right time to invest in the markets. If this is the case, the Geared Returns Plan from Investec Structured Products may offer a solution that offers not only strong potential upside combined with an element of capital protection, but delivers both of these aspects in an efficient way.

Gary Dale is Head of Intermediary Sales at Investec Structured Products

Accumulation Plans

		Term		Inital Investment Risk		Return		Commission
Guaranteed 3 Year FTSE 100 Plan 7		3 years		Initial deposit is fully guaranteed at maturity on both options.		Option 1: 300% of FTSE 100 growth, comparing the Final Index Level to the Initial Index Level, subject to a maximum return of 25%. Growth is subject to averaging over the last three months. Option 2: 3% minimum return, or if greater, 100% of FTSE 100 growth, comparing the Final Index Level to the Initial Index Level, subject to a maximum return of 25%. Growth is subject to averaging over the last three months.		2.25% initial
Guaranteed 5 Year FTSE 100 Plan 7		5 years		Initial deposit is fully guaranteed at maturity on both options.		Option 1: 500% of FTSE 100 growth, comparing the Final Index Level to the Initial Index Level, subject to a maximum return of 50%. Growth is subject to averaging over the last six months. Option 2: 10% minimum return, or if greater, 100% of FTSE 100 growth, comparing the Final Index Level to the Initial Index Level, subject to a maximum return of 50%. Growth is subject to averaging over the last six months.		3% initial
Guaranteed 5 Year FTSE 100 Kick-Out Plan 2		5 years		Initial deposit is fully guaranteed at maturity.		100% of FTSE 100 growth, comparing the Final Index Level to the Initial Index Level, with no upper limit. Option 1: Potential for early maturity at the end of years 1, 2, 3 or 4 with a fixed payment equivalent to 7.25% per annum (not compounded). Growth is subject to averaging over the last six months. Option 2: Potential for early maturity at the end of years 1, 2, 3 or 4 with a fixed payment equivalent to 10% per annum (not compounded) should the level of the Index be 10% higher per annum, respectively, on any of the Plan anniversary dates.		3% initial

Investment Plans

		Term		Inital Investment Risk		Return		Commission
FTSE 100 Protected Growth Plan 6		5 years		Initial investment is protected at maturity, if the Final Index Level is less than the Initial Index Level.		100% of any rise in the Index Level subject to a maximum of 65% return. Growth is subject to averaging over the last six months.		3.5% initial, or 1.25% of initial plus 0.5% renewal, payable on the Plan’s five anniversary dates
FTSE 100 Geared Returns Plan 7		5 years		Initial investment is at risk at maturity if the Index falls at any time to less than 50% of its Initial Index Level and fails to fully recover.		10 times any increase in the Index Level subject to a maximum of 100% return. Potential to double initial investment into the Plan. Growth is subject to averaging over the last six months.		3.5% initial, or 1.25% of initial plus 0.5% renewal, payable on the Plan’s five anniversary dates
FTSE 100 Enhanced Kick-Out Plan 2		5 years		Initial investment is at risk at maturity if the Index falls at any time to less than 50% of its Initial Index Level and fails to fully recover.		120% of any rise in the Index Level. Potential for early maturity at the end of years 1, 2, 3 or 4 with a fixed payment equivalent to 15% per annum (not compounded). Growth is subject to averaging over the last six months.		3.5% initial, or 1.25% of initial plus 0.5% renewal, payable on the Plan’s five anniversary dates
FTSE 100 Accelerated Growth Plan 7		5 years		Initial investment is at risk, if the Final Index Level is less that the Initial Index Level.		165% of any rise in the Index Level. Growth is subject to averaging over the last six months.		3.5% initial, or 1.25% of initial plus 0.5% renewal, payable on the Plan’s five anniversary dates

Income Plan

		Term		Inital Investment Risk		Return		Commission
FTSE 100 and RPI Combination Plan 6		5 years		Initial investment is at risk at maturity if the Index falls at any time to less than 50% of its Initial Index Level and fails to fully recover.		20 quarterly payments equivalent to 2% of the initial investment plus full indexation to UK inflation (RPI) irrespective of the FTSE 100 performance. Maturity payment of an amount equal to 100% of the initial investment, provided the FTSE 100 does not halve during the Investment Term.		3.5% initial