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Barclays creates defensive design to target growth

Barclays Wealth has introduced a structured product that links growth and the return of capital to the performance of the FTSE 100 index over three years.

The March 2012 edition of the target growth plan will produce 21 per cent growth and return the original capital provided the index does not fall by more than 40 per cent during the term, or finishes at or above its initial value at the end of the term.

If both these conditions are breached, the maximum 21 per cent return and the original capital will both be reduced by 1 per cent for each 1 per cent fall in the index at maturity. Where this happens, the combination of the reduced growth payment and the reduced capital return can still provide investors with gains above their initial investment.

At first glance, the potential reduction of growth and the original capital in line with index falls may seem unappealing. However, Barclays’ design can work out more defensive than plans where only the original capital is reduced if the index falls below a set barrier. These plans tend to have an all or nothing approach to fixed growth payments, so investors risk ending up with no growth and a reduced capital return.

Barclays’ approach does not remove this risk, but taking the maximum growth payment into account and calculating down as necessary in line with index falls acts as a buffer if the index breaches both conditions. The upshot is that a reduced level of growth on the one hand may be enough to make up the capital loss on the other, but only if the final index level at maturity is 17.36 per cent below the initial reading. Bigger falls than this will result in capital loss and the plan may take a bit more explaining to clients than some of the more conventional – and simpler – plans.

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