Press Release
Tracker funds outperform Guaranteed Equity Bonds in 9 out of 10 cases - IMA research reveals
11 April 2011
Tracker fund return averaged £1,695 more than the return on Guaranteed Equity Bonds (GEBs), based upon an investment of £10,000 over a 5 year period
Research published today by the Investment Management Association (IMA), comparing the investment returns of tracker funds and National Savings & Investments (NS&I) Guaranteed Equity Bonds (GEBs), reveals that in 9 out of 10 cases, investors would have received higher returns from a tracker fund than from a GEB, which is a form of structured product.
Looking at the ten GEB issues that have matured to date, an investor would have gained an average of £1,933 in each of the nine years the tracker fund outperformed, and would have lost only £449 the one year the tracker fund underperformed the GEB.
Both basic and higher rate taxpayers would have been better off in trackers
- A basic rate taxpayer invested in a tracker fund would have received on average £1,695 more in returns than an investor in a GEB.
- A higher rate taxpayer would have been on average £1,827 better off.
Cost of dividends lost exceeds cost of investing in a tracker fund
Whereas investors in tracker funds benefit from the dividends paid out by FTSE100 companies, which are re-invested net of tax, GEB investors receive no dividends.
- Investors in GEBs have lost out on an average of £2,360 in dividends, over the ten GEBs that have matured to date.
- The cost of these lost dividends exceeds the net cost of investing in a tracker fund by between £1,332 and £1,900, based upon an investment of £10,000.
(See Table 4 of the report.)
Tracker fund investment over time
Taking a longer view, the research looks at what a tracker fund investment might have returned over each of the past 107 years.
- In 92 of the last 107 years, a five year tracker investment would have delivered an average gain of £6,566 on the investor's original capital.
- In 15 of the last 107 years, a tracker fund investor would have made an average loss of £1,217.
Richard Saunders, Chief Executive of the IMA comments:
“Our research lays bare the reality of many structured products. Alluring marketing claims conceal high costs, hidden risks and uncertain returns.
“In the case of Guaranteed Equity Bonds, investors paid large sums of money for protection against a contingency that arises relatively rarely, with the cost out of all proportion to the benefit received.
“With investment products, there is no substitute for simplicity and transparency – these are the standards regulators need to adopt in overseeing the market.”
The IMA today publishes 'Investment Returns from Tracker Funds and Guaranteed Equity Bonds' by Chris Bryant and Emmett O'Sullivan.
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