Norwich Union's latest structured offering Prosper 2 is an interesting concept but does not necessarily offer good value.
Spread over a four-year term, which is divided into eight six-month periods, the returns are linked to the FTSE 100 index.
Basically, the maximum gain or loss is capped at 6.5 per cent in each six-month period and these are all added up at the end of the term. Capital is guaranteed so even if the losses outweigh the gains an investor cannot lose money.
However, in a volatile market, which at the current low level may see some large spikes upwards, the 6.5 per cent limit could well handicap the product.
My preference is a straight participation rate product such as Standard Life's guaranteed FTSE bond.
One issue that IFAs need to consider with FTSE 100-linked structured products is that they do not benefit from the income yield of the FTSE 100 index.
If we assume that long-term total returns from UK equities will be around 7.5 per cent a year, then a product linked only to the capital performance of the the FTSE 100 will miss out on nearly 50 per cent of the total return – the FTSE 100 net yield is currently around 3.6 per cent.
My view is that NU would better serve its IFA customers by changing its with-profits bond offering to a 100/0 structure as soon as possible.
Following the Sandler review, IFAs are already looking to move to contracts that incorporate the most “Sandler-friendly” features. This is an area where NU can compete effectively but it must move quickly.
James Dalby is head of research at Bates Investment Services