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Innovation from Blue Sky

Blue Sky Asset Management has taken a new approach to the provision of income and capital protection with the launch of its smart income plan.

This FTSE-100 linked structured product has a five-year term and provides 6 per cent fixed income in year one regardless of index performance. From year two, income payments of 6 per cent a year are dependent on the index not falling by more than 50 per cent at the end of each year from its initial value. If this condtition is not met in year two, investors will get no income and the plan will continue on the same basis in subsequent years.

The plan also has a feature that BSAM calls capital protection and fixed income activation. This removes market risk to capital and income by allowing the 6 per cent annual income to be secured for the rest of the term if index is at or above its initial value by the end of years two, three or four. If this happens, full capital protection is also provided at maturity.

If this feature is not triggered, there is a second level of full capital protection that kicks in at maturity provided the index does not fall by more than 50 per cent of initial value on the final day of the term. If the index breaches this safety net, capital will be reduced in line with the index performance.

However, it is unlikely that both levels of capital protection will fail because the index is already at a low point of around 4,000 points and would need to halve to around 2,000 points over the next five years for capital to be at risk.

A more pressing concern for advisers may be counterparty risk following the Lehman collapse. The counterparty for the smart income plan is a UK bank, with a minimum AA credit rating. It will be disclosed only to advisers and investors on request, but the counterparty platform on BSAM’s website promotes transparency by listing the credit ratings and credit default swap levels of major counterparties.

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