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Product matters

Newton&#39s protected higher income plan is a new arm of structured products in the retail market.

Instead of tracking an index or using an average of a basket of shares, Newton is using its higher income fund, which has had top-quartile performance every year since launch in 1987.

The five-year plan is 100% capital protected if held until maturity, which means for every £1 invested, there will be £1 returned, provided there is no default from issuers JP Morgan.

Strangely, the plan offers no income option so all income payments are rolled up and paid as a lump sum at maturity. That said, the proceeds will be taxed as income and not as a capital gain, preventing investors from using their capital gains tax allowance.

The plan&#39s performance is based on a proven reweighting mechanism known as constant proportion portfolio insurance, which adjusts the asset allocation between equity and cash.

As the net asset value of the fund rises, the equity exposure is gra-dually increased and cash exposure is red-uced with the reverse as the NAV of the fund falls. During rising markets, exposure is inc-reased to a maximum of 150 per cent while, in falling markets, the exp-osure falls to 10 per cent.

During volatile markets, anything with 100 per cent capital protection should not be overlooked. However, it is frustrating that there is no income option, esp-ecially considering that the underlying fund is income-oriented and two-thirds of the structured product market buys for income. Furth-ermore, the complic-ated structure does not make the plan as transparent as some rivals.

Darius McDermott is managing director of Chelsea Financial Services

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