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Chelsea warns of heavy losses on index bonds

Most investors with structured products maturing in the coming months are set to sustain heavy capital losses as poor design and downside gearing take their toll on performance, according to Chelsea Financial Services.

The company&#39s figures reveal that just six of the main 19 index-linked bonds maturing between April and August are on course to return 100 per cent of capital. The other 13 are likely to leave investors facing losses approaching 70 per cent.

One of the worst offenders is Canada Life&#39s Nasdaq-linked high-income bond 3, which needs to grow by 173 per cent by April 12 to return 100 per cent of capital.

At current levels, an investment of £10,000 in the bond, which has two for one downside gearing, would return just £3,150 at maturity.

Another poor performer is the NDF extra income & growth plan 2, which is linked to the EuroStoxx 50 and requires 151 per cent growth by May 22 to return full capital. At present, investors can expect £3,275 from their original £10,000.

Chelsea managing director Darius McDermott says many structured products suffer from design “tricks” which boost the headline rate at the expense of overall return.

He says: “In hindsight, many bonds were poorly designed but some were paying triple the income of interest rates. Many will fail to return capital but a lot will beat their market. IFAs need to be careful when recommending them.”

NDF managing director Anthony Stack says: “The products have performed in accordance with the terms they were promoted on. All of them are victims of the worst markets in 40 or 50 years.”

•Miles files, p34

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