A useful "halfway house" for more risk-adverse investors

There is a striking characteristic of the UK investment market, and it is one with which everyone from the Chancellor of the Exchequer to every savvy financial planner is grappling: a risk aversion which is evidenced by a disproportionate amount of people’s savings being held in cash form.

A staggering 63.2% of adult ISA accounts in 2022/23 were subscribed in cash rather than stocks and shares.  Not only is this potentially depriving UK companies of funds for investment and growth, but for investors, cash investments may not offer the same long-term growth potential – or even keep pace with inflation.

For those who are put off by the perceived risks of investing in the stock market, and who want more control over their level of risk, there is an interesting ‘halfway house’: Equity-Linked Structured Products (ELSPs).  These custom-built investments are linked to the stock market, but are designed to give investors some protection if things don’t go as planned – and extra rewards if they do.

There are a number of different types of ELSPs.  They may include income boosters which earn regular payments if the market stays steady or goes up, while at the same time offering a safety net, returning the original capital even if the market dips (depending on the individual product).  Some even offer ‘Growth Kickers’, which pay extra if the market performs well, sometimes more than you would earn from simply owning stocks.

Another attractive feature of some ELSPs is the ‘Kickout’ option.  This is a bit like cashing out on a bet while your team is ahead, but before the final whistle blows, essentially enabling the investor to take any gains before the full term of the product, thus avoiding any subsequent market dips.

For people who want to grow their money and take advantage of the higher growth potential of stocks and shares, but without taking on the full market risk, ELSPs are worth considering.  Because they offer more control over that risk – including options which protect your money even if the market dips – as well as potentially higher returns than cash investments, they are ideal for investors who are cautiously optimistic about the market. 

What’s more, they can be built around the investor’s individual goals, whether that is safety, income or growth (or a combination of all three with whatever weighting suits the individual).  ELSPs can also be wrapped up in a SIPP or ISA for maximum tax efficiency.

You will find examples of these products linked to all sorts of indices, but at Lovewell Blake Financial Planning we stick to the main ones such as the FTSE 100; people going down this route tend to have a more cautious risk profile than some other investors, and want that reassurance.

For long-term investors, it is unlikely that many forms of investment will outperform stocks and shares, but for those concerned about the risks – real or perceived – in taking that plunge, ELSPs can offer a useful halfway house, allowing investors to put a toe into the stock market and potentially enjoy higher returns than cash investments, without embracing the full risk of doing so.