Savings that aren’t so ‘risk-free’
How’s this for an attractive investment offer? Deposit a chunk of your savings and in return you get a yield of 12%. There are no fees or annual charges, your capital and yield are guaranteed and you have instant access to your money whenever you need it back.
Too good to be true? Well, this is exactly the offer made in emails to investors all over the country. The ‘12% fund’ is run by Leonard Berney. A press release issued on his behalf says: “During 1984, private investor Leonard Berney was searching for a way to increase the return on his capital.”
The London Stock Exchange had just launched the FTSE 100 share index, and instead of buying individual shares it was possible to deal in options on the index itself, in effect betting on whether it would rise or fall.
Berney’s press release continues: “It seemed to him that it might be possible to make a good return by trading these new Footsie Options so, during 1984, he formulated and tested a trading system to profit from them. He started investing in this system at the beginning of 1985 and has done so ever since. The results have been very profitable. Over the years from 1985 until now, he has made an average return of 38% a year.”
So far, so good. But guarantees or not, the truth is that high returns come with high risks, and while Berney may claim that he has made 38% a year, the same cannot be said for some of his clients.
In the 1980s, Berney controlled a traded options scheme that cost investors half their capital. He is not licensed anywhere as a stockbroker or financial adviser, and when he advertised from an address in Surrey, claiming to make a consistent 41% a year, City watchdogs forced him to stop.
In Ireland, he set up an address in Dublin and offered a yield of 18% to investors. The Irish Central Bank promptly shut him down, describing his whole scheme as ‘unlawful’.
Even the advertising for Berney’s schemes cannot be trusted. Four years ago he was behind a series of advertisements that claimed: “Invest your capital in a British Government bond and receive a regular monthly income of 12% a year”.
There was no such bond that paid 12%. Anyone answering the advertisement was asked to deposit at least £20,000 with a firm of brokers and give Berney the right to invest it on their behalf. True, some money did go into government stock, but the income relied completely on Berney’s bets on the FTSE.
How does Leonard Berney get away with this, year after year? Well, he lives in Spain and does not invite investment from Spaniards, so the authorities in Madrid appear to turn a blind eye.
Nevertheless, financial watchdogs as far apart as Hong Kong and Slovenia have issued public warnings. He even attracted a warning in the press in New Zealand not long ago, when his scheme was promoted there.
Traded options are risky at the best of times but there is no need for anyone to add to the risks by trusting an unlicensed advisor with such a chequered past.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.