The ingenuity of our industry is as strong
as ever when we look at the plethora of new stockmarket-linked bonds. It
is vital to analyse each one and I will focus on NDF Technology Plus,
promoted as offering “all
of the thrills and none
of the spills”.
We have a capital guaranteed product over five years and every six months
the rise or fall in the Nasdaq 100 index is locked in. Crucially, the rise
is capped at 12 per cent but the loss is not capped (apart from the 100 per
cent capital guarantee). It can be argued that this Index now offers a very
good opportunity, particularly over five years for capital growth.
I now come off the fence. Do you want a technology investment capped at 12
per cent every six-monthly period from a volatile index, which, as we know
from the past, is capable of far greater than this and yet at the same time
we are fully exposed to losses that could potentially wipe out a number of
the 12 per cent gains?
Some of these bonds involve aspects of rocket science but investment
basics surely dictate that if your client wants a technology investment,
they take out an open-ended one. Over five years, it would be very unlikely
to fall, but they would get full upside potential and the flexibility to
come out when they wish.
I note with interest that the excellent analytical team at Future Value
Consultants gives this bond four out of 10, calling it “unexciting”.
In 2007, I will look at my technology investment and the NDF investors
will wonder why they have been drinking champagne without any bubbles.