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: 13.1% of the original investment in year if the indices are the same or higher than the starting level, 26.2% in year two, 39.3% in year three, 52.4% in year four, 65.5% in year five or 78.6% at the end of the term
Guarantee: Original capital returned in full provided the indices do not fall by more than 50 per cent without returning to at least its starting level
Closing date: June 14, 2007, May 31, 2007 for Pep/Isa transfers
Commission: Initial 3%
Tel: 01727 734315
This capital-protected product from NDF is linked to the FTSE 100 and Nikkei 225 indices for six years.
Lowes Financial Management managing director Ian Lowes thinks advisers still steer clear of structured investment contracts and while there may be many reasons for this, his belief is that anyone who ignores the opportunities some of these contracts present are potentially doing their clients a mis-service.
“The latest breed of potential early maturity contracts are a good example. Contracts of this nature first became widespread when Premier Asset Management launched a series of contracts linked to the FTSE 100 in 2003 and since then other providers have followed with a variety of offerings. These contracts are now often referred to as “kick out plans. One could argue it sounds unreasonably derogatory, but they do what they say on the tin,” he says.
Lowes points out that the more traditional contract of this nature required the FTSE 100 to be the same or higher that its level at the start of the contract on any one of the subsequent six annual anniversaries. “On the first occasion this occurred, the plan would mature repaying the original capital plus, say 8 per cent for each year the plan had been held. In the event that on none of the six anniversaries the index was higher, at the end of the term capital would be repaid without any growth. But if the index had fallen by 50 per cent or more during the term, a capital loss would occur, equivalent to the fall in the market over the full term. It is important to appreciate the distinction that these contracts do not participate in the market rise but simply have a defined return provided the market rises,” he says.
Lowes feels this latest offering from NDF is the most impressive variant to date. “Although the risk to capital and the potential for an ultimate loss or no return is increased through the use of two indices compared to the earlier Premier contracts, the potential to achieve a return of 13.1 per cent a year from little or no stockmarket growth presents an attractive balance between risk and reward.”
He notes that the plan is linked to both the FTSE 100 and the Nikkei 225 indices, a formula that NDF have stuck to for other products over the last year or so and that have been popular. “Due to the cost of the underlying assets, the earlier versions offered a potential 10 per cent return for each year that the contract had been held, but recently, derivative prices have moved making them significantly more attractive. Meteor Asset Management, a company that grew from the ashes of Nvesta, was the first to take advantage of the attractive pricing within its Prima Growth Plan. Hot on their heels however, in what one would be forgiven for thinking seems to be the start of a price war, NDF returned to the market with a potential 13.1 per cent a year return.”
According to Lowes, the main downside of using two indices is that in unfavourable market conditions, either of the two could breach the 50 per cent protection barrier and if the contract runs its full term, the worst performing of the two indices dictates the percentage by which the capital is reduced. “Investors may therefore face a situation where the Nikkei falls more than 50 per cent but then recovers, while the FTSE slips down by 10 per cent over the full term and so the 10 per cent loss is dictated by the index that did not break the protection barrier,” he says.
That said, he feels that if investors expect that the FTSE 100 and the Nikkei 225 to rise over the next six years, the NDF product is worth looking at as part of a diversified portfolio, unless they think market growth will be phenomenal. “After all, where else can you find the potential return of 13.1 per cent a year resulting from what could ultimately be just a slight increase in the market,” he says.
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average