Type: Combination of a high interest account and a guaranteed equity bond
Aim: Income on half the investment through the high interest account and growth on half the investment linked to the RBS UK Balanced Sector index, RBS Environmental Strategy index and/or RBS Commodity Strategy index
Minimum-maximum investment: £3,000-no maximum, Isa £3,600, £5,100 for the over 50s
HIGH INTEREST ACCOUNT
Term: One year
Interest rate: 5% gross
GUARANTEED EQUITY BOND
Term: Five years and two weeks
Return: 50% of the growth in the index or indices at the end of the term
Guarantee: Original capital returned in full regardless of the performance of the index or indices at the end of the term
Closing date: January 8, 2010
Commission: Initial 2%
Tel: 020 7012 2809
Gilliat Financial Solutions has established a structured product that splits investors’ capital equally between a fixed-rate savings account and guaranteed equity bond held with RBS, the counterparty. This element is linked to the UK Balanced Sector, RBS Environment Strategy and/or RBS Commodity Strategy indices. Gilliat says investors may choose more than one index to increase diversification, subject to the overall minimum investment of £3,000.
Introducing the product, Baronworth Investment Services director Colin Jackson says: “This is a new product offering investors a fixed interest payment of 5 per cent gross after one year on half of the investment. The balance is put into a five year and two -week structured deposit that pays interest at the end of the term calculated by reference to a choice of indices.
“Half of the capital will be repaid at the end of one year and the remainder at the end of year five subject to the counterparty/credit risk.”
Jackson notes that the counterparty is the Royal Bank of Scotland, which he thinks should give an element of reassurance both to IFAs and their clients.
“Gilliat has decided to come away from the usual index (for example, the FTSE 100) and instead, offer investors the choice of RBS UK Balanced Sector Index (UK Equities), RBS Environmental Strategy Index (Worldwide Equities) or RBS Risk Stabilised Commodity Strategy Index (Commodities).”
Jackson thinks that although an interesting choice, it may well be that the unsophisticated investor will be put off, not having heard of any of these indices. “On the upside, the literature is well written and easy to understand. Investors can make direct investments or via a cash Isa. Investors can also transfer a cash Isa from previous fund managers.”
Jackson observes that usually, the deadline for Isa transfers falls before the final investment deadline for direct investments and new Isas. With this particular product, the investment deadline of January 8, 2010 is the same, irrespective of how the client invests.
Assessing the adviser remuneration, Jackson notes initial commission is only 2 per cent. “But, to be fair, this comes as no surprise as 50 per cent of the investment is repaid to the investor after one year.”
Jackson adds that the return on the balance is based upon the performance of the selected index. “This part of the investment is linked to the overall performance of the index between the start date and the end date. What happens during the term has no effect. However, there is a period of averaging of 13 months in calculating the closing value. Although this has the effect of reducing volatility, it also can constrain growth, and therefore returns on this product, in a rising market.
Turning to the potential drawbacks Jackson says: “All returns will be taxed as income unless held within an Isa wrapper. Although this is a deposit type product, in effect, it is a growth product so many investors would expect the returns to be taxed as a capital gain.
Discussing the main competition, Jackson cannot find any other product that offers similar features, particularly with regard to the choice of indices and return of capital.
Summing up, Jackson says: “I should imagine this investment will appeal to cautious investors. Part of the appeal is the fact that they will have returned to them 50 per cent of their investment after one year with 5 per cent interest – quite attractive in the current climate.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average