Type: Capital-protected bond
Aim: Growth linked to the performance of five FTSE 100 companies in different sectors – BHP Billiton, GlaxoSmithKline, HSBC Holdings, Royal Dutch Shell and Tesco
Minimum-maximum investment: £10,000-no maximum, Isa £10,680
Term: Five years and two weeks
Return: Growth of 5.5% for each quarter that the plan is invested plus capital provided all five shares are at or above 95% of their initial values
Protection: Original capital returned in full at the end of the term provided none of the shares falls by more than 50% by the final day of the term
Closing date: October 12, 2011 for bank transfers, October 7,2011 for cheques, September 30, 2011 for Isa transfers
Commission: Initial 3%
Tel: 020 7904 1010
This ‘kick out’ structured product is linked to the performance of five stocks on the FTSE 100 for a term of five years and two weeks. It provides growth of 5.5 per cent for each quarter the plan is invested, plus capital, provided none of the shares falls in value by more than 5 per cent.
Putting the plan in to context, Baronworth Investment Services director Colin Jackson says: “Kick-out plans are flavour of the month and seem to be becoming even more in demand due to the fall in the FTSE 100. However, this particular kick-out plan is linked to the closing share prices of five FTSE 100 shares, not the index.”
Jackson feels that the potential return of 5.5 per cent for each quarter that the plan is in force is extremely attractive. But in his view, the fact that the returns are linked to the five individual share prices adds another layer of risk particularly as the closing share price of all five shares have to be at least 95 per cent of their opening levels before the plan will kick-out.
“In the current economic climate, even taking into account the high-grade shares selected, there is a distinct possibility that one or more of the shares will be below 95 per cent of the opening level at any quarter reading date meaning that there would be no kick-out.
“If there has not been a kick-out and the plan runs for it’s full term, the growth payment will be 110 per cent as long as the closing levels of all five shares are at least equal to 95 per cent of their opening levels”
Jackson points out that if any of the shares are below 95 per cent of their opening levels, then no growth payment will be made. “If the plan does not kick-out the amount of capital returned will be decided by the performance of the lowest performing share. If the final level of that share is more than 50 per cent below it’s opening level the capital will be reduced by the same percentage that it’s final level is below it’s opening level.
“If the final level of the worst performing share is at or above 50 per cent of it’s opening level, then investors will receive a full return of capital. Of course, to offer a potential return of 5.5 per cent a quarter means that there has to be a downside. In this case, it is the greater risk than if the returns were linked to a single index such as the FTSE 100.”
The counterparty is the Royal Bank of Scotland, which has a Standard and Poors’ rating of A+ that Jackson sees as very reassuring for the investors.
“Any returns are taxed as a capital gain. As the vast majority of investors in the UK do not utilise their CGT exemption, then subject to the levels of the investment/returns, investment can be made as a direct investment using the Isa allowance for something else.”
Jackson is pleased with the literature, as it is very well presented and easy to understand. He adds that the adviser remuneration of initial 3 per cent is in line with the market.
Discussing the potential drawbacks, Jackson says: “The main bone of contention is the fact that the kick-out and the return of capital if a kick-out does not occur is linked to the performance of all of the five shares selected. It only needs one share to under perform to prevent a kick-out or see investors lose all or part of their original investment. “
There are a number of kick-out products on the market and Jackson feels that those linked to the FTSE 100 will compete with this product.
Jackson concludes: “To achieve a potential quarterly kick-out of 5.5 per cent means that the risk element has to be increased. Only the investor can decide whether the risk versus reward equation is acceptable to them.”
Suitability market: Average
Investment strategy: Poor
Adviser remuneration: Good