Money: Lock in gains and put a lid on losses

Last week's news that a Morgan Grenfell fund manager broke City rules by pumping millions into risky hi-tech companies will make many small savers still more wary of the stock market.

They know that their bank and building society savings are earning only a derisory rate of interest, and realise that equities are where the greater rewards lie. And yet many still hold back from buying shares, fearing that they will see their savings disappear in a repeat of the 1987 crash.

Now banks and other fund managers are trying to woo these savers with PEPs which, they say, can offer the best of both worlds - all the potential growth of a rising stock market, but no risk of your capital falling if the market drops. The latest such guaranteed products come from Barclays Unicorn and Marks & Spencer.

Barclays Unicorn's Grant Phillips says: "The man on the street recognises the stock market is where the money is, but he's just not prepared to take that extra step. The problem that has come to light at Morgan Grenfell just goes to show that it's time for the unit trust industry to look at how it can protect savers."

An earlier generation of safety-first products, such as NatWest's Safeguard unit trust, work not by guaranteeing your capital will stay at or above its original level, but by setting an annual benchmark and aiming to ensure that your capital does not fall more than 5 per cent below that level.

However, the new products are much more straightforward, saying simply that, if your investment is worth less in five years than it is now, they will make up the difference.

Barclays Guaranteed PEP puts savers' money into the company's FT-SE 100 tracker trust, which shadows the performance of Britain's 100 biggest companies. Money goes into the fund on 8 November this year for a five- year term.

If the market rises during that period, investors will get the full growth of the FT-SE 100. If the market should fall, then Barclays will give savers a cheque to make up their capital to its original level.

Mr Phillips says: "We see this as the next step for Tessa people. We're talking about people who want to benefit from all the gains there are to be had on the stock market, but are nervous about getting their feet wet."

The guarantee does not apply to any sums withdrawn from the plan before 8 November 2001. An exit charge of up to 4.25 per cent also applies on early withdrawals. Minimum investment is pounds 1,000.

There is an initial charge of 5 per cent, plus an annual fee of 1 per cent on the unit trust element and a fixed charge of 1.2 per cent to cover the guarantee.

Unlike most providers, Barclays Unicorn levies the guarantee charge only on your original investment, as opposed to its growing value.

This can make quite a difference. Assuming growth of 9 per cent a year, paying an annual charge of 1.2 per cent on an investment of pounds 6,000 as it grew year by year would mean total charges of pounds 462.

Pegging that charge to the original pounds 6,000 for the full five years - as Barclays Unicorn does - means total charges of just pounds 360.

The plan is available from Barclays branches or through independent financial advisers. "Even though this product is easy to understand, we think these types of customers still need advice," says Mr Phillips.

Marks & Spencer's Guaranteed Capital Investment Plan, like the Barclays PEP, will make up any shortfall in investors' capital if the FT-SE 100 should fall over the five years to 8 November 2001. In this case, the guarantee is underwritten by M&S Financial Services. An earlier version of the same plan pulled in pounds 25m in just four weeks in March this year.

Minimum investment in the M&S PEP is pounds 3,000. There is no initial charge, but there is an annual unit trust charge of 1 per cent and a guarantee charge of 1.75 per cent - this time levied on the growing value of the fund. There is no exit charge on early withdrawals from the M&S plan, and the guarantee also applies if the planholder dies during the five- year term.

It is unlikely that either Barclays Unicorn or M&S will ever have to make good on their guarantees, as the chances are the stock market will rise over any five-year period. But some investors will find the guarantees worthwhile just for peace of mind. Della Morgan of M&S says: "Obviously, the chances are the guarantee won't be necessary. We hope the stock market won't go down, but it's anybody's guess what could happen over the next five years."

A third new PEP, this one from HSBC Asset Management, offers not a straightforward money-back guarantee, but a combination of deposit-based investment, interest rate swaps and share options which should ensure that, even in a falling market, savers get their original investment back after five years. The company does not describe the fund as guaranteed, but as being "capital secure".

If the FT-SE 100 grows over the plan's five-year term, investors will get all of that growth, plus a bonus of about 25 per cent. The bonus applies only if the plan is kept running for the full five years. There is an initial charge of 5.25 per cent and an annual charge of 0.5 per cent. The price of HSBC's "guarantee" is that investors get no income in the form of dividends from the shares they own. The plan is available through IFAs.

HSBC's Adam Noon says that, while the company hopes to attract the same first-time equity investors Barclays Unicorn and M&S are pitching for, it also hopes to pull in more experienced investors. "One of the major markets will be people who have had PEPs for a number of years and are now looking to lock in some of those gains because they're a bit more nervous with the effects of a new government on the equity market."