Type: Capital protected bond
Aim: Growth linked to a portfolio of UK bank shares comprising HSBC, Royal Bank of Scotland, Lloyds TSB, HBOS and Barclays
Minimum-maximum investment: £10,000-no maximum, Isa £7,200, Isa transfers £7,000
Term: Six years
Return: 12.5 times the growth in the share basket subject to a 125% cap
Guarantee: Original capital returned in full at the end of the term provided none of the shares falls by more than 50% without returning to at least its original value
Closing date: June 16, 2008, May 23, 2008 for Isa transfers
Commission: Initial 3%
Tel: 020 7096 7100
Blue Sky Asset Management’s accelerated recovery plan aims for growth over a six-year term by investing in a portfolio of UK bank shares comprising HSBC, Royal Bank of Scotland, Lloyds TSB, HBOS and Barclays.
Lowes Financial Management managing director Ian Lowes says: “This investment provides a unique approach to investing in the shares of the five main banks, albeit without the dividend income. It provides a degree of protection to capital in the event of the underlying share performance being relatively poor, whilst also providing accelerated participation in the potential recovery of the financial sector from current levels.”
Lowes observes that the exposure to the underlying shares is based on the average share price over the first three months of the term. He says his will reduce the potential for the current volatility to have a detrimental effect on the plan simply because of unfortunate timing.
The investment term is six years and the maximum return equates to growth of nearly 14.5 per cent a year, which Lowes says could be achieved by the portfolio rising just 10 per cent. “The investment is however only likely to be suitable for a select band of clients and then only for a small part of their portfolio’s,” he says.
Discussing the drawbacks of this plan Lowes says: “Linking the potential capital loss to a single share clearly increases the risk. Based on the terms outlined in the brochure, it is possible that the average portfolio value is in positive territory, but because one bank’s share price had fallen by more than 50 per cent during the term, a loss occurs.”
He adds that while the banks are looking like attractive investments at the moment, it is the future that counts and the thing about the unexpected is that it is just that – unexpected. “We won’t know whether another Bear Stearns or Northern Rock is around the corner until after the event. Spreading your risk across a well-diversified portfolio is as important as ever,” he says.
Lowes rates the product’s market suitability and investment strategy as poor for most investors, but stresses that as it could be attractive to some clients with very specific needs, this does not make the product poor overall.
Scanning the market for potential competitors Lowes says: “This is, to my knowledge, the only investment of its type. If a similar investment philosophy were sought, the only real alternative would be to invest in the shares of the five banks directly. This would mean that the investor benefited from the current high dividend yields, assuming they are maintained, but they would not benefit from the potential capital protection or potential acceleration offered by this investment. Neither would they face the potential where a failed stock could affect all of their portfolio. “
He adds that if all that is sought is exposure to the five banks, this investment offers a potentially attractive alternative to direct equity purchase and interesting growth potential in absolute terms.
Suitability to market: Poor
Investment strategy: Poor
Adviser remuneration: Average