Type: Capital-protected bond
Aim: Income and the return of capital linked to the performance of the index
Minimum-maximum investment: £3,000-no maximum, Isa £10,200
Term: Six years
Return: 3% income in year one regardless of index performance, subsequent income payments of 3% in year two, 4% in years three and four, 5% in years five and six paid only if the index does not fall by 30% or more at the relevant anniversary
Protection: Original capital retuned in full at the end of the term regardless of the performance of the index
Closing date: September 27, 2010, September 20, 2010 for Isa transfers
Commission: Initial 3%
Tel: 020 7425 9000
Morgan Stanley’s defensive income plan is an income product that provides full capital protection regardless of index performance.
Putting the plan into its market context, Julie Smith, investment administration manager at Fair Investment says: “Looking for alternative income producing products is always high on the agenda for both advisers and clients alike. This six-year plan benefits from capital protection if held to maturity and offers a competitive 3 per cent coupon in the first year regardless of the performance of the FTSE 100 Index.
Smith points out that each year, from year two onwards, the pre-determined income payment will be made as long as the Index does not fall by 30 per cent or more from its starting level on the relevant annual observation date. “If a breach in the barrier does occur then no income will be paid for that year and it cannot be recouped in subsequent years, although the barrier does give some protection from downward markets, ” says Smith.
She mentions that there are the usual ways to invest, either by direct investment, through a stocks and shares Isa or Isa transfer, as well as self-invested personal pensions and small self-administered schemes.
“As with most income producing products, the plan is subject to income tax, with payments made gross of tax and a declaration will need to be made on the relevant tax return, if applicable,” says Smith. She adds that as usual, Morgan Stanley’s literature is clear, informative and easy to understand.
Turning to the less appealing features of the plan, Smith says: “Other than the first year of the plan, income payments are dependent on the performance of the FTSE 100, which can be difficult to position within a client’s income portfolio, especially for those requiring a known income stream. “
The plan is capital protected if held for the full six year investment term, but Smith observes that the income stream is at risk. “The maximum return available through the plan is 24 per cent over the six year period. When you compare against fixed-rate bonds currently available, there are several paying in excess of 4 per cent gross fixed for five years, giving a maximum return of 20 per cent.”
Smith says that her fixed-rate bond example does not provide a direct comparison to the Morgan Stanley product because it has a different term and the returns reflect the use of a tax efficient wrapper. But she adds that it does provide a rough idea of the cash rates available and how much income is at risk if markets were to fall below the 30 per cent barrier at an observation date.
Smith expects to see competition from fixed rate bonds and Isas and capital protected structured products such as the Royal Deposit Plan 5 , which is a three- year structured deposit paying an annual income of 4.15 per cent gross.
Summing up, Smith says: “Overall, this plan may be suitable for those who want to outperform cash, albeit marginally, and who are confident that the markets will remain flat or have a slightly negative performance.”
Suitability to market: Average
Investment strategy: Average
Adviser remuneration: Average