How safe are your investments?

May 16, 2018 | Tony Byrne's View

Did you know that collective investment schemes, primarily unit trusts and OEICS, have unprecedented levels of investor protection?

Every collective funds management group has Financial Services Compensation Scheme, FSCS, compensation protection of £50,000 per person. This works like the deposit protection scheme for banks and Building Societies which have compensation protection of £85,000 per person per banking group.

So if you have a portfolio of say 15 funds with 15 different fund management groups then your investor protection is £750K (15 x £50K).

In addition to this did you know that every collective investment scheme has an independent custodian or nominee? Why is this important? Because it means that your investment is registered in the name of the custodian, usually a large independent bank unrelated to the fund manager, which protects your money in the event that your fund manager fails.

Let me give you an example of such an event. Most readers of this blog will be aware of Nick Leeson, the rogue trader, who brought down Barings Bank in 1995 through fraudulent trading. There was of course a film made of it called Rogue Trader. Funnily enough I actually met Nick Leeson at an ETF Conference a few years ago in Amsterdam and had a chat with him on a coach. He’s actually quite a contrite and modest man. He gave a presentation at the conference ironically on how to have better internal controls in fund management companies! He makes his living by presenting at conferences worldwide these days because it is pretty much all he can do to make a living! Anyway I digress.

The bank collapsed and all of its depositors lost 100% of their bank deposits with Barings above £20,000, the then deposit protection scheme limit. Of course this made headline news at the time.

However, it is a little known fact that investors in Barings Unit Trusts didn’t lose a penny. Why was that? Because Barings’ custodian was an independent bank which meant the funds were protected and untouchable by Barings Bank. Because this was good news it never made the headlines!

The Investment Association has been around in one guise or another since 1959. It is the association for collective investment schemes such as unit trusts and OEICS. During the history of the Investment Association no fund has ever gone bust and lost investors money. In 1996 a Morgan Grenfell fund manager Peter Young committed a large fraud. Deutsche Bank, its parent company, was forced to pay substantial compensation of £400m so again no investor lost any money.

Not all funds are eligible for investor protection under the FSCS, most notably ETFs and investment trusts are not covered. This is because ETFs and investment trusts are in fact shares which means they are unprotected like all shares. However, if you invest in them via a regulated collective investment scheme such as the CCM Intelligent Wealth Fund through our sister company Minerva Money Management then you do benefit from investor protection under the FSCS.

Of course we cannot guarantee that your investment will not fluctuate up and down in value. Prices will always rise and fall. However, your investment into a collective investment scheme is a very safe place to invest in terms of investor protection.

So if you’d like to invest your money with us and benefit from excellent investor protection do get in touch. You know it makes sense.

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