Type: Capital-protected Oeic
Aim: Growth linked to the performance of the FTSE 100 index
Minimum investment: Lump sum £1,000, Isa lump sum £500
Term: Three years
Return: 8% at the end of year one if the index is the same or higher than its initial value, 16% at the end of year two, or 24% at the end of year three
Guarantee: Original capital returned in full provided the index does not fall by more than 50% by the end of the term
Closing date: July 31, 2009, July 1 for Isa transfers from external managers, July 24, 2009 for Isa transfers from Aviva building society partners
Charges: Initial 5.34%
Commission: Initial 2%
Tel: 0845 607 2439
Defined returns fund 1 from Aviva Investors is a capital-protected Oeic which is linked to the FTSE 100 index for three years, but may mature earlier through an early kick-out feature.
Bright Financial Services sales director Paul Breaks says: “The aim of the fund is to provide a defined return on either the first or second anniversary, or at maturity based on the performance of the FTSE 100 index. It also aims to provide protection against a fall in the index, unless it falls by more than 50 per cent at maturity.”
Breaks explains that if the average closing level of the index is equal to or greater than the starting level, the fund matures after one year with an 8 per cent return. If not, it continues and the same measure is applied at the end of year two, when it has the potential to mature with a 16 per cent return.
“By the end of the third year 24 per cent growth is added to the original investment, provided the average of the FTSE is equal to or greater than the starting level. If the FTSE has fallen but not by more than 50 per cent, the client receives the return of their capital. If it has fallen by more, say 60 per cent, the client would lose 60 per cent of their capital.
Breaks likes products that have early kick-out features and he regards this product’s potential for an 8 per cent return after a year as very attractive. “I believe that in 12 months time the FTSE 100 will be further ahead, provided we do not get a strong rally before the start date, as the measures that world governments have taken begin to impact and confidence improves.”
He prefers this fund’s three year term relative to five-year products. “A possible 24 per cent return subject to capital gains, not income tax is also very appealing,” he says.
Breaks thinks the literature is much clearer than was the case with some structured products. With low interest rates likely to continue for the foreseeable, he says there is a market for such products. However he is less enthusiatic about the IFA commission. “The 2 per cent commission is less inspiring, but with a potential second bite of the cherry in 12 months if the product kicks out, I can live with it.” he says.
Turning to the less appealing features of the fund Breaks says: “My concern is whether anyone truly understands these products given recent events, even allowing for the fact that HSBC is the counterparty in this case.”
He says that the potential loss is substantial and all but the worldly wise will take some convincing such fallls and losses are unlikely.
Breaks believes that the competition will come from similar products but points out that many are longer than three years.
Summing up he says: “I think the client who is more sophisticated, well diversified and prepared to accept the potential loss and counterparty default risk will find this fund of interest, particularly as it is not subject to income tax. It may also appeal to clients looking to rejig their battered Isa portfolios.”
Suitability to market: Good
Invest strategy: Good