Type: Capital-protected bond
Aim: Income and the return of capital linked to the performance of the FTSE 100 index
Minimum-maximum investment; £3,000-no maximum, Isa £10,200
Term: Six years and two weeks
Return: Income up to 7% a year depending on index performance
Protection: Original capital returned in full at the end of the term provided the index does not fall by 40% or more by the final day of the final
Closing date: July 8, 2010
Commission: Initial 3%
Tel: 020 7012 2809
This issue of Gilliat’s income builder is a FTSE 100-linked structured product that aims to provide a variable annual Income of up to 7 per cent during the investment term of six year and two weeks.
The income payment accrues daily so long as the index does not fall 40 per cent or more from its initial value. This works through a series of options that pay a fixed coupon of 0.027 per cent for every day during the term that the index is greater than 60 per cent of its initial value. This means the maximum income possible during the term is 42 per cent and each annual payment will reflect the number of days in that year that the index is greater than 60 per cent of its initial value.
The product also has a 60 per cent capital protection barrier, so that investors will receive a full capital return at the end of the term provided the index does not fall by 40 per cent or more by the final day of the term. For capital protection purposes, index levels are measured only at the start and the end of the term, so its performance during the rest of the term does not affect the return of capital.
Looking at the ways in which this product could be useful for advisers and their clients, Fair Investment Company investment administration manager Julie Smith says: “It is good for those seeking an income stream. In the current market, we are seeing a reduction in competitive income rates available so this product may be worthy of consideration.”
Smith notes that capital is at risk, but the plan does benefit from a 40 per cent safety net. She says: “Any breach of this is only measured at maturity by comparing the Final Level to the Initial Level, thereby reducing the overall risk of the plan.”
Assessing the supporting literature for the plan Smith says: “The user friendly language within the literature makes the plan easier to understand and identify what is on offer, and the risks involved.” She adds that the IFA commission of initial 3 per cent is competitive.
“There are a variety of product wrappers available for this plan, including direct investment outside of an Isa, a tax efficient stocks and shares Isa for new monies or Isa transfers from previous tax years. Alternatively, the plan is also available for Sipp and SSAS investments,” says Smith.
Turning to the less attractive features of the plan Smith says:”Some advisers may find the way income is calculated difficult to explain to clients. The maximum annual income of 7 per cent will be paid as long as the FTSE 100 remains above 60 per cent of the initial level. However, for any year in which the Index closes at or below 60 per cent of the initial level, the 7 per cent income payment will be reduced in proportion with the number of days the Index closed at/below the initial level. This does add to the complexity of the plan and makes it more difficult to quantify. For this reason the variable income aspect may be difficult to position in a client’s income portfolio. “
Smith scans the market for products that could compete with Gilliat. She says: “Any income producing products, ranging from pure cash fixed-rate bonds to structured investment plans such as the Morgan Stanley FTSE income plan. The latter is a six- year plan offering an annual income of 7.5 pe cent that is not dependent upon the performance of the FTSE 100. Capital is at risk with this product, which has a 50 per cent safety net. However, unlike the Gilliat income builder, any breach is monitored throughout the investment term and not just at maturity.”
Summing up Smith says: “As the search for income producing products is always high on the agenda, this plan does offer an alternative for those not concerned if an income stream is fixed or variable.”
Suitability to market: Good
Investment strategy: Average
Adviser remuneration: Good