ROYAL BANK OF SCOTLAND INTERNATIONAL
Nasdaq Guaranteed Return Bond
Type: Guaranteed offshore bond.
Aim: Growth linked to the Nasdaq-100 index.
Minimum investment: £5,000 or $10,000.
Place of registration: Jersey.
Investment split: 100 per cent linked to the Nasdaq-100 index.
Guarantee: Capital plus 10 per cent returned at end of term even if index falls below starting level.
Yield: Quarterly rise in index averaged over the term, subject to a maximum of 9 per cent per quarter.
Isa link: No.
Tel: 01534 285200.
Simon Clements, Director, S&G Financial Management,
Miles Mosely, Managing director, Miles Moseley Financial Management,
Martyn Green, Adviser, MBA Sterling UK.
Suitability to the market 6.4
Investment strategy 5.4
Company's reputation 5.7
Product literature 6.4
Royal Bank of Scotland International's Nasdaq guaranteed return bond is a guaranteed equity bond that tracks the Nasdaq-100 index over a three-year period. Investors are guaranteed to get their original capital plus 10 per cent returned at end of the term even if index falls below starting level.
Establishing the bond's position in the market, Clements says: “There are several offshore bonds offering different levels of capital guarantee plus potential investment growth depending on the increase in various stockmarket indices. This product is interesting in that it offers a guaranteed positive return plus potential growth linked specifically to the Nasdaq-100 index.”
Green says: “This product fits in well alongside other guaranteed bonds and has the edge of providing a guaranteed minimum return for investors at the end of the term.”
Moseley thinks it fits into the market reasonably well because it gives a minimum guarantee of just under 3.5 per cent ayear compounded with the chance to receive much more.
Identifying the potential clients for the bond, Green says: “This bond is suitable for clients who wish to invest in a volatile index, which can give the prospects of capital growth, but at the same time do not wish to see their capital eroded if the index falls over the term.”
Moseley suggests risk averse investors looking for a bit of excitement. Clements says: “The product appears to be suitable for a naturally cautious investor who is also tempted by the apparent growth potential of the high tech, media and telecommunications stocks linked to the Nasdaq-100 index.”
Turning to the possible marketing opportunities, Moseley says: “Perhaps it is useful as a core holding for a risk-averse investor.”
Clements says: “In my view, the product offers very limited marketing opportunities as it falls between two schools. It provides a low guaranteed income which could be bettered elsewhere with limited growth potential in an investment vehicle which is not tax efficient for most individuals.”
Green says: “This product will appeal to taxpayers who wish to defer paying tax on any interest earned over the three years while the investment is offshore. Clients who wish to invest in volatile investments, but without risk of losing all of their capital.”
Pointing out the main useful features and strong points of the bond, Green says: “The investment follows only one index, so it is quite easy to track any rise or fall for the client. There is no risk to clients' capital as long as the bond is held to maturity. Gains are also paid gross.”
Moseley says: “The minimum guarantee (10 per cent growth). The chance to achieve 27 per cent annual compound return if markets work in the investors favour – although the index must rise by 9% each quarter to achieve this – most unlikely.”
Clements says: “The main attraction is that the minimum 10 per cent interest payment appears to be guaranteed regardless of whether the Nasdaq-100 falls over the period. Most bonds do not guarantee a return of capital let alone a positive return if the relevant index falls significantly over the period.”
Moving onto the bond's main drawbacks, Clements says: “The overwhelming disadvantage is that growth is capped at nine per cent per quarter, but the downside is unlimited. In a volatile market the uncapped falls could easily negate the capped growth leaving investors with no actual benefit despite the overall increase in the index. The second major disadvantage is that the bond is an income producing asset and gains will be taxed at the individual's highest rate. Most clients would be better advised to invest through unit trusts or investment trusts, allowing them to utilise their capital gains tax exemptions.”
Moseley points out that investors are locked in if interest rates rise during the three year term and that gains are taxable as interest. Green says: “Although there is a guaranteed minimum return, this is relatively low, especially after tax.”
The panel agree that the bond is not flexible. Moseley says: “There is no flexibility. Take it or leave it.” Clements says: “The product has no flexibility. It is a three-year term deposit and values during the term are not guaranteed and may not be available at all.” Green says: “There is no flexibility offered. Clients can only close the account with the bank's permission.”
Identifying the bond's main rivals, Moseley says: “Other providers of guaranteed deposit accounts – perhaps National Savings index-linked certificates.”
Green suggests other guaranteed bonds and Clements says: “Several guaranteed income bonds provide higher income and many unit trusts offer greater growth potential. In the guaranteed bond market, AIG and other companies have a number of stockmarket linked bonds with a much greater degree of flexibility.”
Assessing Royal Bank of Scotland International's reputation, Moseley says: “Royal Bank of Scotland has a blue-chip reputation.” Green and Clements feel unable to comment.
Moving onto Royal Bank of Scotland International's past performance, Clements says: “There is no active management involved in this product, so past performance is irrelevant.” Moseley and Green feel unable to comment.
Looking at the product literature, Moseley says: “The literature is brief but clear and seems to say everything that is required except the past performance of the Nasdaq-100 Index. This makes its claims difficult to substantiate.”
Clements says: “The product literature is rather simplistic and may provide an over-optimistic suggestion of possible returns.” Green thinks the literature is simple and easy to understand.
Summing up, Clements says: “This is a hybrid product which attempts to attract cautious investors to a volatile market by providing a safety net return of a low guaranteed income.”
Moseley says: “It is an okay product but a 108 per cent return is pie in the sky and possibly very misleading.”