Type: Capital-protected bond
Aim: Growth linked to the performance of the FTSE 100 and S&P 500 indices
Minimum-maximum investment: £10,000-no maximum, Isa £7,200 until April 5, 2010, £10,200 for the over 50s and for all investors from April 6, 2010
Term: Six years
Return: 18.5% at the end of year two provided both indices are at or above their initial values, 27.7.5% at the end of year three, 37% at the end of year four, 46.25% at the end of year five or 55.5% at the end of year six
Guarantee: Original capital returned in full at the end of the term provided neither index falls by more than 50% without returning to at least its initial value
Closing date: April 19, 2010, April 5, 2010 for 2009/10 Isa applications, April 1, 2010 for Isa transfers
Commission: Initial 2.75%
This structured product from Blue Sky Asset Management is linked to the UK and US stockmarkets through the FTSE 100 and S&P 500 indices for six years. It has an early kick-out, or auto-call, feature which can be triggered from year two, providing the equivalent of 9.25 per cent of the original investment for each year of investment plus the original capital. If this feature is not triggered, investors will receive a full capital return at maturity provided neither index falls by more than 50 per cent without recovering to at least its initial value.
Discussing the product features in detail, Baronworth Investment Services director Colin Jackson says: “This plan provides growth potential of 9.25 per cent annualised over a six- year term with the auto-call feature from the second anniversary paying an 18.5 per cent return. There will be an early closure of the plan if the FTSE 100 and S&P 500 indices are at or above their initial levels. In other words, no growth in either index is required.”
Jackson adds that if the plan does not auto-call at the second anniversary, the growth potential accumulates by 9.25 per cent each year throughout the investment term, with the same auto-call condition applying at each anniversary.
“There is a risk to capital. If either or both of the indices fall by more than 50 per cent during the investment term and at least one index is below it’s starting level at maturity, capital is at risk and will be lost on a one for one basis in line with the performance of the worst performing index.”
Jackson observes that Rabobank, the counterparty, is rated AAA by S&P which he finds a very reassuring factor. Returns are subject to capital gains tax which is also well received by Jackson. “Most people in the UK do not use their CGT exemption each year which means that they should be able to receive all or part of their returns free of tax without having to utilise their Isa allowance, which they can use for something else,” he says.
In Jackson’s view, the product literature is well written and very easy to understand. But he thinks it not particularly attractive from a retail investor’s point of view. Adviser remuneration of initial 2.75 per cent is viewed by Jackson as slightly below the market level, with no renewal commission.
Turning to the less appealing features of the plan Jackson highlights the capital protection. He says: “The return of capital is linked to two indices, the FTSE 100 and S&P 500. Capital is not protected at maturity if one or both of the indices fall by more than 50 per cent during the investment term and at least one index is below its starting level at maturity.
“Although the potential return is extremely attractive, the additional risk to investors in having two indices and determining the final value on the basis of the worst performing index is a definite downside.”
Identifying the main competition, Jackson says: “There are a number of kick-out products on the market currently, most of which are linked to one index only. This would certainly be my preference but the potential return would be lower.”
Summing up, Jackson says: “The AAA-rated counterparty, returns taxed as a capital gain and the attractive potential returns may appeal to investors even though the returns are linked to two indices with the final value determined by the worst performing one.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Poor