Earning a fixed income within your investment portfolio is highly desirable. During periods of high interest rates, savers are rewarded for keeping cash deposits in the bank with annual interest payments. In 1979, Bank of England interest rates hit 17%, meaning savers were handsomely rewarded, whilst borrowers were hit with hefty fees.
Interest rates have continued to fall to their lowest point in recent history, meaning savers are no longer rewarded for holding their cash deposits in the bank. As an example, Barclays Bank are offering 0.01% interest per year in their Everyday Saver account.
This blog explores what options are now available for those looking to achieve a fixed income on their savings.
In recent years, there has been an evolution in the fixed income market. This has led savers to ditch their deposit accounts held with their high street bank. Many savers are now opting for fixed income yielding structured products. Below we explore how they work.
What are Fixed Yield products?
Structured or fixed income products operate by offering depositors a fixed return which is dependent on certain market conditions. These conditions generally depend on major markets maintaining 80% or 90% of their value.
This means depositors can earn a fixed return (cash coupons), usually paid on a quarterly basis, even in a scenario where major underlying markets drop by 20%.
Fixed Yield products also include memory features. This means if coupons are missed due to a dip in the market, they will be back paid when the market returns above the coupon barrier.
When the Coronavirus pandemic struck, many clients holding fixed income products missed quarterly coupons due to the market falling by around 40%. However, once the market recovered in the following months, the memory feature ensured coupons were paid. This means clients can earn coupons in flat, rising or slightly falling (20%) market conditions.
The risk level of fixed-income investments varies from ultra-cautious developed market notes to growth-focused notes which track individual companies. As is often the case with investing, the higher the potential return, the higher the risk. Because of this, retail investors should seek advice from a financial professional before making a decision.
Like any investment, there is always a degree of risk involved. With structured products, there are two main risks.
- The first is known as ‘issuer risk‘. This is where the investment bank providing the product goes out of business. This risk is minimised as much as is reasonably possible by only employing investment banks with stable long term credit ratings of Aa3, A+ & AA-.
- The second risk is ‘market risk‘. This is where the underlying market falls below both the coupon barrier and the protection barrier. Usually, products have a 30%-40% protection barrier. This means the underlying market can fall by 30-40%, and client’s capital is fully protected.
A further risk mitigation tool involves the term of the product. Fixed coupon products usually run for at least four years. This means it falls in the market can be absorbed during the term of the product.
Historically, the fixed income investing tools mentioned above were only available to institutions or investors looking to deposit upwards of $1,000,000. In recent years due to advances in fintech, retail investors can now access fixed-income investment products from $10,000 and above.
Investors can access fixed income products via the guidance of their financial advisor or through execution-only platforms, including the deVere Investment App.
Fixed income investments have various benefits, including income security, downside market protection and investment growth in flat rising or slightly falling market conditions.
However, these kinds of investments are not suited to every portfolio for reasons such as an investors time horizon. If you are unsure whether fixed income investments are for you, don’t hesitate to contact deVere Group for a complimentary consultation.
Fixed income for 2022
As investors plan for 2022 and beyond, gaining understanding the potential benefits of fixed income instruments is vital. With markets riding high and bank deposits yielding 0.01% per annum, exploring the potential benefits of fixed income investing is wise.
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