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I have just received an email promoting a new structured product which has made me very angry indeed!

Firstly, the email is headed “Do you want to earn 9% commission per month..?”!

This is a ridiculous offer, clearly not good value for the client, and is exactly the sort of thing that has given our industry a bad name over the years.

Secondly, the product claims to be “capital protected” but is in fact backed by corporate bonds in banks. As with any corporate bond, if the bank survives to the maturity date then the capital is repaid, but this is by no means guaranteed.

The fund has taken the view that the Government will step in and protect any bank that gets into trouble, but even this won’t necessarily protect bond investors.

The product literature actually says in its “risk warnings” section that default is possible if the bank became insolvent but implies it is NOT in the event of nationalisation. It says: “Nationalisation would improve the security of bank bonds since it would imply that the Government would ‘stand behind’ the bank.”

The corporate bond market clearly does not believe returns are guaranteed, as they are currently pricing these bonds at around 60p in the pound. The market still feels there is significant risk of default, despite government backing.

In fact, investors who hold some Bradford & Bingley bonds are now no longer receiving coupons, even though it is now in government ownership.

We will be forwarding this promotion to the FSA and asking them to look closely at these claims.

If the FSA are happy with the promotion, then perhaps we will consider changing the name of our Fixed Interest portfolio to the “Capital Protected Portfolio”! *

* Let me make it clear that it is NOT capital protected in any way, corporate bonds are a “risk asset”.

 Mike Deverell, Investment Manager