This capital-protected bond has a six-year term and is linked to the performance of a basket of natural resources. This basket comprises 20 per cent Brent crude oil, 20 per cent copper, 20 per cent nickel, 20 per cent zinc and 20 per cent exposure to four utility companies.
To calculate the returns the price of each commodity is recorded at the start of the term and again at the end of the term. The growth is measured as the difference between the two figures, so there is no averaging.
Investors will receive a full capital return at the end of the term plus four times the growth of the first 25 per cent, plus any growth above 100 per cent. This is designed too allow investors to benefit if growth is modest or exceptionally strong.
For example, if the basket grows by 25 per cent, investors will receive four times this – 100 per cent – plus their original capital.
If the basket grows by 60 per cent, investors will receive the same returns – 100 per cent plus their original capital. This is calculated as four times 25 per cent because although the growth in the basket is 60 per cent, this is capped at 25 per cent.
If the basket grows by 120 per cent investors will get four times the growth up to the cap -100 per cent – plus 20 per cent, which is the return above 100 per cent.
IDaD says pricing dictated the level of gearing that could be achieved with this product without sacrificing the full capital protection on offer. It could have offered gearing on the whole of the growth in the underlying assets, but only if it offered protection based on their performance.
This plan could also be attractive for IFAs who are keen to asset allocate, with diversification away from the usual array of FTSE 100-linked products. Increasing demand for resources from developing countries in particular could mean some investors find this product attractive, particularly if they value capital protection as a safety net.
However, investors do not benefit fully from average growth that is above the 25 per cent cap but does not exceed 100 per cent, as illustrated by the example of 60 per cent growth in the commodities basket.