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Gilliat makes structured product debut

Gilliat Solutions

Income Series Issue One

Type: Capital-protected bond

Aim: Income and the return of capital linked to the performance of the FTSE 100 index through option one, the S&P GSCI ER Index through option two or the FTSE Epra/Nareit Europe Index through option three

Minimum-maximum investment: £3,000-, Isa £7,200

Term: Five years and 14 days

Return: Option one – 0.55% income a month, option two – 0.6% income a month, option three – 0.625% income a month

Guarantee: Original capital returned in full provided the index does not fall by more than 50% without returning to at least its initial value

Closing date: October 30, 2009, October 9, 2009 for Isa transfers

Commission: Initial 3%

Tel: 020 7012 2400

Income series issue one is the first product from Gilliat Financial Solutions. It provides a choice of underlying indices, which produce different levels of monthly income.

Baronworth Investment Services director Colin Jackson says: “Gilliat is part of the Arbuthnot Banking Group, a company with a strong financial heritage going back to the 1830’s. A lot of time and effort went into this first product which, in the main, is highly attractive.”

Jackson points out that it gives a choice of three underlying assets – the FTSE 100, S&P GSCI-ER and the FTSE Epra/Nareit Developed Europe indices.

“These indices give monthly income of 0.542, 0.6 and 0.625 per cent respectively. In the current climate these are extremely attractive returns, even more so because they are paid monthly.”
Jackson feels that who is the counterparty underpinning structured products is of the utmost importance.

“In this product it is Citigroup, rated A by Standard & Poor’s. Another interesting and important aspect is how the returns are taxed. With this product, they are taxed as dividends, which means that basic rate taxpayers should have no further tax liability,” says Jackson.

He observes that higher-rate taxpayers will be liable to 25 per cent tax, as opposed to 40 per cent. “ This means basic rate taxpayers can get their returns free of tax without having to use their Isa allowance, which can be used for a different investment,” says Jackson.

The return of capital is not guaranteed but is dependant upon the performance of the selected index. “ There is 50 per cent soft protection with daily observations. In other words, if the barrier is breached, capital is at risk,” says Jackson.

Capital will be reduced by 1 per cent for every 1 per cent drop between the start index level and the final index level. “If, however, the index breaches the 50 per cent barrier but recovers to its start level, there will be full return of capital. Unfortunately, this is not stated in the term sheet but, rather, tucked away in the investment guide,” says Jackson.

So far as the literature is concerned, Jackson says Gilliat has decided to approach its preparation differently from its competitors. “Instead of having a brochure for the product, they have a term sheet together with a generic investment guide that they will be using for forthcoming products. The actual literature is very well written and easy to understand,” says Jackson. He adds that adviser remuneration is in line with the market.

Considering the less attractive features of the product Jackson says: “The return of capital scenario is not readily apparent from the literature. Although giving investors a choice of underlying investment, I would hazard a guess that not many people have heard of the S&P PGSCI-ER or FTSE Epra/Nareit Developed Europe indices. The lack of familiarity may put them off. “

One surprising aspect for Jackson is that Gilliat has decided against supplying application forms with the literature. “These can be supplied on request but it is, to me, surprising that application forms do not form part of the pack. What is the point of sending a prospective investor all of the literature but not include one of the crucial components without which he/she cannot invest?”

He adds that in the term sheet it is stated that the maximum Isa investment is £7,200 but the application form refers to £10,200 if an investor is aged 50 or over at 5 April 2010, which is effective from 6 October 2009.

“Without seeing an application form, a potential investor would be left with the distinct impression that he/she could only invest £7,200 and not take advantage of the extra £3,000 allowance for those aged 50 or over at 5 April 2010.”

Jackson complains that the literature is quite bulky, even without the application form, so it is probably unsuitable for a direct mailer. “ Gilliat may wish to consider preparing a lightweight pack for this purpose,” says Jackson.

Jackson cannot find any other products that offer a choice of indices and with such attractive monthly returns taxed as dividends. He feels that Gilliat has a head start over competitors.

Summing up Jackson says: “I hope Gilliat will reconsider its decision not to include application forms with the pack or, at least, ensure that the term sheet refers to the increased Isa allowance.


Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Good

Overall 8/10


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