Donaldson says: “This product is aimed at investors who require income, and want this income protected against inflation. There must also be a belief that the UK market as measured by the FTSE 100 index will not fall by 50 per cent over the next five years.
“If the index falls, but not by more than 50 per cent, full capital will be returned at the end of the term. If the index falls by more than 50 per cent, capital will be returned on one for one basis – for example, if the index falls by 55 per cent return will be 45 per cent of original capital. As long as the index does not close at the end of the term at a lower level than at the start of the term the original capital will be returned in full.
“The only other risk associated with this product is the counterparty. If the counterparty becomes insolvent before the end of the term the original investment will be lost. In this instance the counterparty is Morgan Stanley International the counterparty.
“In these times of volatile markets and very low returns on cash, this may be appealing to income investors. With the RPI currently reaching 5 per cent and showing no immediate signs of falling back, these returns are looking attractive.
“The irony of the plan is that the more income that is paid out the higher the inflation rate is and the less real value the original capital will have. However, as income is paid out at 1.5 times inflation, this will be seen as adequate reward for any real drop in capital. It is here that the adviser and client need to way up the pros and cons.
“One thing to note though is that although returns are linked to the FTSE 100 index, it should not be considered an investment in the UK from a portfolio construction point of view. If there is one outcome that is highly unlikely, it is that the return on maturity will reflect the return on the UK FTSE 100 index.