Type: Capital-protected bond
Aim: Growth linked to the performance of the FTSE 100 index
Minimum-maximum investment: £10,000-no maximum, Isa £7,200, £10,200 for the over-50s
Term: Six years
Return: 45 to 75 per cent growth based on positive and negative movements in the index, provided index is at above its initial value on the final day of the term
Guarantee: Original capital returned in full at the end of the term provided the index does not fall by more than 50% by the final day of the term
Closing date: November 9, 2009, October 26, 2009 for Isa transfers
Commission: Initial 2%
Blue Sky Asset Management’s absolute return plan is a capital-protected bond linked to the performance of the FTSE 100 index for six years. It provides growth of 45 to 75 per cent based on positive and negative movements in the index, provided index is at above its initial value on the final day of the term. A full capital return is provided if the index does not fall by more than 50 per cent by the final day of the term.
Lowes Financial Management managing director Ian Lowes points out that the investment has three possible maturity outcomes depending on the performance of the FTSE 100 index over the six-year term.
“The first is that in the event that the FTSE 100 level at the end of the six years is more than 50 per cent below that recorded at the beginning, the investment will suffer an equivalent loss. The second is that if the FTSE is down but by less than 50 per cent the original investment should be returned in full. Finally, if the FTSE is higher the investment should produce a gain of between 45 and 75 per cent.”
Lowes feels that the first two outcomes require no further explanation but thinks the third outcome does. “The potential gain payable at maturity will be the sum of the annual movements in the index. For the purpose of the calculation of the annual movements, the index movement each year will be subject to a maximum of 12.5 per cent. The negative movements count as gains – for example a 15 per cent gain in year one and a 2 per cent fall in year two give a cumulative potential bonus of 14.5 per cent.”
Lowes observes that the maximum potential return of 75 per cent will only be achieved if the index moves by 12.5 per cent or more, up or down, each year and finishes the six-year term at or above the level recorded at the start of the term. “However, in the event that the six annual movements total less than 45 per cent, provided the index is higher at maturity than it was at commencement, the plan will produce a minimum gain of 45 per cent,” he says.
As with all structured investments, Lowes notes that the security of capital and any returns are dependant upon the counterparty meeting their obligations. “The counterparty to the absolute return plan is Société Générale. This is France’s third largest bank, by market capitalisation, with a Standard & Poor’s credit rating of A+.
According to Lowes, the plan provides the potential to benefit from both positive and negative movements in the FTSE 100 index, provided the overall movement is positive, but he feels that investors should consider the offer in the context of the potential overall return. “Although the FTSE 100 has been somewhat volatile over the last year or so the potential to achieve the maximum return of 75 per cent is possibly slim. However we are reasonably optimistic that the index will show positive growth over the six years, so a gain of at least 45 per cent is likely.”
Lowes also thinks the likelihood of achieving a gain in excess of 45 per cent is, a significant factor in determining the value of this investment at this time. “A return of 45 per cent can be achieved from an alternative investment offered by Barclays, the Defined Returns Plan. This does not expose the invested capital to the potential of loss in the event of a falling market,” he says.
Lowes points out that the capital under the Blue Sky plan is being put at risk as a trade off in the hope of achieving a gain of more than 45 per cent through the annual movement calculation. “That said, whilst past performance is not necessarily a guide to the future, the FTSE 100 has never recorded a loss of 50 per cent or more at the end of any six-year period in its history. But it is not impossible.”
Turning to the potential drawbacks of the plan, Lowes says: “Blue Sky has certainly shown innovative flair, which is very welcome. However, a simper structure could have provided an attractive fixed return of more than 45 per cent payable in the event of a rising market, although this would admittedly be less than the 75 per cent possible under Blue Sky’s structure. “
He thinks that advisers may use the Blue Sky plan as a diversification play, as it is arguably an attractive complement to other plans.
Suitability to market: Average
Investment strategy: Poor
Adviser remuneration: Poor
Overall 4 /10