A tale of two options from Barclays Wealth
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Barclays Wealth - Defined Returns Plan Annual Kick Out April 2010
Type: Capital-protected bond
Aim: Growth linked to the performance of the FTSE 100 index
Minimum-maximum investment: £3,600-£500,000, Isa £10,200
Term: Six years
Return: AKO 100 option - 7% at the end of year two provided index is at or above its initial value, 14% at the end of year three, 21% at the end of year four, 28% at the end of year five or 35% at the end of year six, AKO 90 option - 7% at the end of year three provided index is at or above 90% of its initial value, 14% at the end of year four, 21% at the end of year five or 28% at the end of year six
Guarantee: Original capital returned in full at the end of the term provided the index does not fall by more than 50% by the final day of the term
Closing date: June 9, 2010, May 14, 2010 for Isa transfers
Commission: Initial 3%
Tel: 0800 234 6023
This capital-protected bond from Barclays Wealth is linked to the performance of the FTSE 100 index for a six-year term, but can mature earlier through an early kick-out feature, which depends on index performance.
Looking at the ways is this product is good for IFAs and their clients, Fair Investment Company investment administration manager Julie Smith says: “The plan fits well within the market place and is suitable for those searching for the attractive returns associated with stockmarket investments, but who do not want the same degree of risk to their capital.”
Smith observes that the plan offers the choice of two options, which she feels gives increased flexibility and wider audience appeal, especially as the FTSE 100 need make only modest gains for the early maturity feature to be triggered.
“Both options offer the potential for an attractive coupon of 7 per cent for every year the plan is held subject to the conditions being met,” she says.
Smith points out that the kick-out feature in option 1 is based on 90 per cent of the initial level, which gives a higher probability of early maturity compared to that of Option 2. However, she adds that the downside of this option is that maturity cannot occur before year three. “With option 2, the kick-out is based on 100 per cent of the initial level but it does have the benefit of potential early kick out from year two onwards,” she says.
As with most kick-out structures, Smith says that if the pre-set return conditions are not met, there will be no additional returns payable and return of the original capital is at risk. The 50 per cent safety net does, however, offer a welcome degree of capital protection from market falls and has the additional benefit of only being measured at maturity and not throughout the whole investment term.
“As returns from the plan are expected to be treated as capital gains rather than income for tax purposes, this is an obvious tax advantage for those who want to utilise any unused capital gains tax allowance in the year of maturity,” says Smith.
She notes that the plan is available for investment in a variety of ways such as direct investment, stocks and shares Isa, Isa transfers, trustee investments, Self-invested personal pension and small self-administered schemes. “It can also be used to invest for children using a designated account on their behalf, in which case any CGT liability is based on the child’s tax position,” says Smith.
Turning to the potential drawbacks Smith says: “There may be some nervousness with kick-out plans in general following HMRCs recent bulletin. However, Barclays has confirmed that they are confident that its structures are not affected by HMRC’s comments.”
Considering which plans are likely to provide competition, Smith says: “Possibly other structures with kick-out features, such as Morgan Stanley best entry growth plan 4. This offers enhanced growth returns of 200 per cent of any positive growth in the FTSE 100 over the six-year term, capped at 85 per cent. It has a 50 per cent safety net, which is not monitored throughout the investment term and calculation of the initial level has a built-in market timing feature.” She also thinks open-ended structured funds such as Citi’s UK autocall fund could compete.
Summing up Smith says: “Overall, the plan has a clean, transparent structure with easy to understand literature. Risk to capital is clearly explained and as long as it is positioned correctly, it could prove useful in portfolio planning.”
BROKER RATINGS
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Good
Overall 8/10
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