Type: Capital-protected bond
Aim: Growth linked to the performance of the FTSE 100 index
Minimum-maximum investment: £3,600-£500,000, Isa £7,200
Term: Five years
Return: 40% of the original investment provided the index does not fall by
more than 50% by the final day of the term
Guarantee: Original capital returned in full provided the index does not
fall by more than 50% by the final day of the term
Closing date: October 19 2009
Commission: Initial 3%
Tel: 0800 234 6021
This capital-protected bond from Barclays Wealth provides potential growth of 40 per cent and a full capital return provided the FTSE 100 index does not fall by more than 50 per cent when comparing its value on the first and last days of the term.
Chelsea Financial Services head of investment products Matthew Woodbridge says that his company has been keen on previous versions of this product, when the potential growth was 50 per cent, then 45 per cent. “However, as a result of rising markets and other factors that affect the pricing of these products the coupon is now 40 per cent. Nevertheless, a potential return of 40 per cent after five years even if the FTSE 100 has halved is still attractive in the current environment.
Woodbridge finds the product literature clear and easy to understand. He notes that the returns are treated as capital gains rather than income, so investors who do not use all their capital gains tax allowance could still get all or part of their returns tax free.
“This is potentially very attractive to higher rate tax-payers, especially those with an income of £100,000 or more who will be hit hard by the Budget changes to levels of income tax from next April.”
Woodbridge adds that an often overlooked tax planning tool for IFAs is that if a client invests in a designated account on behalf of their child, any CGT liability is based on their child’s tax position, not their own. “This is not the case for income tax liability,” he says.
The IFA commission of initial 3 per cent is viewed by Woodbridge as standard adviser remuneration for a five- year structured product.
Highlighting the less attractive features of the product Woodbridge says: “There is risk to the capital with this product, but only if the index finishes more than 50 per cent below its initial index level on the final day of the plan. This is known as hard protection and is perceived as far better for investors than soft protection, which takes into account market movements
throughout the term.”
A further downside that Woodbridge mentions is that if the barrier is broken, the growth is reduced along with the capital. “This is not a common feature among other structured products and means that if the barrier breached there would be a substantial reduction in the investors’ capital.
For example, if the final index level is 75 per cent lower than the initial index level, a client would get back £35,000 on an investment of £100,000 – in other words 35 per cent of their original capital. This comprises 25 per cent of the 40 per cent growth, which amounts to £10,000, plus 25 per cent of their original capital – £25,000.
“However, to put this in perspective the FTSE100 would have to finish at 1250 in five years time, assuming a start level of 5000 points,” he says.
Woodbridge adds that any growth in the index above the 40 per cent growth is not passed on to the investor but this is standard among structured products.
Scanning the market for products that could compete with the target growth plan Woodbridge says: “There is no product in direct competition with the plan. Similar products offer full capital protection but require some market growth for the pay-off. The TGP does not require any market growth for the pay-off. In fact, the market can be 50 per cent lower in five years’ time and the product will pay out the coupon together with the original capital.”
Woodbridge concludes: “Advisers should be aware that the counterparty risk lies with Barclays Bank currently rated AA- by Standard & Poor’s, so they must feel comfortable with that risk.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average