Type: Capital-protected bond
Aim: Growth linked to the performance of the S&P Bric 40
Minimum-maximum investment: £5,000-no maximum, Isa £4,000-£7,000
Term: Five years
Return: 75% of the growth in the index at the end of the term
Guarantee: Original capital returned in full regardless of the performance of the index
Closing date: June 22, 2007, June 8 for Pep/Isa transfers
Commission: Initial 3%
Tel: 0207 425 9000
This capital-protected bond from Morgan Stanley is linked to the performance of the S&P Bric 40 index for a term of five years. This index comprises a basket of 40 securities that represent the biggest and most liquid companies in Brazil, Russia, India and China.
Considering the ways in which the Morgan Stanley product is good for IFAs and their clients, Baronworth director Colin Jackson says: “At 75 per cent, the participation rate is extremely attractive, as is the capital protection at maturity. The useful features are the ability to invest within an Isa, Isa or Pep transfer, Sipps and SSASs.”
He adds that the adviser remuneration of 3 per cent initial commission is in line with the market, but points out that there is no trail commission.
Switching to the potential drawbacks of the product Jackson has several points to make. “Although the literature is attractively produced, by the very nature of the product, it is complex and difficult to understand in places,” he says.
He also thinks it is unlikely that very many of the investing public will have heard of the S&P 40 index, which he feels could put some people off investing.
“Unfortunately, any returns are taxed as income. We always prefer to see a capital gains tax treatment. It is our understanding that the index is quoted in US dollars and Euros. According to the literature the investment is denominated in sterling. This may lead to a currency risk although, of course, this could work in the investors’ favour,” he says.
Finally. Jackson notes that the literature states that the markets that the index relies on can be volatile and cyclical. “Although there is capital protection at maturity, this could prove to be off-putting for investors particularly those who are looking for a lower risk investment,” he says.
Scanning the market for possible competitors Jackson notes there are plenty of products where the returns are linked to the performance of an index with capital protection at maturity, but this is the first one that I has come across where the index is the S&P Bric 40. “This being the case, it is hardly surprising that I cannot locate any real competition,” he says.
Summing up, Jackson says it is difficult to ascertain what market the provider is after. “It is offering a high risk investment coupled with capital protection at maturity. Surely it would have been better to offer a higher participation rate with either no capital protection or soft protection. This would have targeted the risk-taking market as opposed to those who are risk averse,” he says.
In Jackson’s view, if an investor is merely looking for an investment where performance is linked to a single index coupled with capital protection, he imagines the investor would choose a product linked to a better known index instead.
Suitability to market: Poor
Investment strategy: Average
Adviser remuneration: Good