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NDF index duo a drawback

NDF Administration

Growth Kick Out Plan September 2006

Type: Capital-protected bond

Aim: Growth linked to the performance of the FTSE 100 and Nikkei 225 indices

Minimum-maximum investment: £10,000-£1m, Isa £7,000

Term: Six years

Return: 11% of the original investment in year if both indices are at the same or higher than the starting level, 22% in year two, 33% in year three, 44% in year four, 55% in year five or 66% at the end of the term

Guarantee: Original capital returned in full provided both indices do not fall by more than 50 per cent without returning to their starting levels

Closing date: October 31, 2006, October 17, 2006 for Pep/Isa transfers

Commission: Initial 3%

Tel: 01727 734315

This offering from NDF provides a return of 11 per cent a year depending on the performance of the FTSE 100 and Nikkei 225 indices. It also offers a full capital return if both indices do not fall by more than 50 per cent without recovering to their initial values.

Baronworth director Colin Jackson says this product offers a potentially very attractive return of 11 per cent a year. “ As is to be expected with NDF, the literature is well produced and easy to understand – notwithstanding the complexity of the product,” he says.

In Jackson’s view, the adviser remuneration of 3 per cent is in line with the market. Any returns are subject to capital gains tax, as opposed to income tax, which means that investors who do not use their CGT allowance can receive all or part of the return tax free. They can also use their Isa allowance for something else.

Looking at the potential negative aspects of the fund Jackson says: “There is limited capital protection. If the 50 per cent protection barrier is breached, then there will be capital loss on a 1:1 basis.”

He also regards the fact that the return of capital is linked to two indices – the FTSE 100 and Nikkei 225 – as a potential drawback. “Return of capital is linked to the worst performing Index so, if either of the indices falls by more than 50 per cent below the initial index level at anytime, then there will be loss of capital. This adds significantly to the risk,” he explains.
In terms of competition, Jackson notes that there have, from time to time, been similar products on the market but at this particular moment he cannot find anything similar.

In summary Jackson says: “ Although the headline rate is a real eye catcher, we are not at all keen on a product where return of capital is linked to more then one index. What makes this particular product unattractive is the fact that once the protection barrier has been breached the level of capital returned on maturity is calculated using the level of the worst performing index, which is not necessarily the index that breached the protection barrier. – a double whammy.”


Suitability to market: Poor
Investment strategy: Average
Adviser remuneration – Good

Overall 5/10


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