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Woolwich cherry picks winning indices

Woolwich Plan Managers has introduced cherry picker issue 1, a guaranteed equity bond linked to a weighted basket of three stockmarket indices over a five-year term.

Investors will get a full capital return regardless of the performance of the FTSE 100, S&P 500 and Dow Jones Eurorostoxx 50 indices. Thy will also get 100 per cent of the growth in the basket of indices.

The portfolio weightings are not fixed to each index at the outset. Instead, they will be allocated retrospectively, so the best performing index will represent 50 per cent of the portfolio, the second best will make up 30 per cent and the worst performer will comprise 20 per cent. When calculating the returns the closing level of the indices will be measured at the start of the term and compared with the average over the final year of the term.

This product follows the same strategy as the recently established performance seeker designed by German bank West LB. However, the West LB product offers exposure to the FTSE 100, S&P 500 and Nikkei 225 over a six-year term and does not base the final returns on averaging, so it is not an exact comparison for the Woolwich product.

However as the approach is broadly the same, the advantages and drawbacks are also similar. Providing greater exposure to the index with the highest growth solves the potential problem with equally weighted portfolio in that one index could dilute the impact of a better performing index.

However, weighted portfolios work best when there is some deviation between the performance of the indices where performance is similar there is less of an advantage relative to a basket of equally weighted indices.


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