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A second menu of structured products for ISA season... - 26/02/2020

Blair Carmichael, Lowes Financial Management

With the end of the tax year looming, both savers and investors alike should remember to consider their £20,000 ISA allowance for the 2019/20 tax year, which can shelter investments (or deposits) from income tax and capital gains tax.

Likewise, this time of year also presents the opportunity for those wishing to maximise the benefit of their allowances to take steps towards utilising next tax year’s ISA allowance at the beginning of the tax year. With this in mind, many structured products offered at this time of year often bridge the two tax years and are therefore eligible for ISAs being used for either tax year – or both.

In this article I am again taking a look at some of my favourite ‘Preferred’ plans, that could be used within an equity and alternatives bucket of a broader investment portfolio. All of the investments I am showcasing are again autocall (kick-out) products, linked to the FTSE 100 Index with the ability to mature from year two onwards, with a maximum potential term of more than six years.


- Auto-calls statistically increase the probability of a positive outcome for the investor when compared to a product not utilising an autocall feature. The thesis is simple: More chances to mature equals increased likelihood of maturity. This is however, assuming that all other terms remain equal.

- The FTSE 100 Index is a broadly diversified, internationally exposed index of significant ‘blue-chip’ equities which is widely quoted and understood by UK investors.

- Each holding will be in force for at least two years, thereby meaning intermediary and brokerage fees have a lower impact on total return compared to products that mature after just one year.

- By having a maximum term beyond six years; we are increasing the number of opportunities for maturity through the autocall, whilst repositioning market risk to an observation point / potential loss trigger some years later.

Whilst I have listed four plans, I would be inclined to favour the first three listed in the table for someone with a less pessimistic market outlook. This is because the returns on offer are greater than those offered by the more defensive, fourth product, which incorporates a ‘step-down’ defensive feature, which aims to increase the likelihood of maturity in the latter observations of the plan’s term, should the plan fail to mature earlier.

My first three are plans each have the same maturity trigger level throughout, albeit at different levels; 95%, 100% and 105% of initial index levels.

The Walker Crips UK 95% Kick-out Plan Issue 7 offers a potential 8% return for each year held and has a 60% end-of-term capital protection barrier observed at the end of 7 years only if the plan has not matured before then. The counterparty is Morgan Stanley & Co. International plc.

Option 2 of the Mariana Capital 10:10 Plan is the ‘at-the-money’ / 100% option, which will mature if the FTSE is at or above the initial index level on any potential maturity date, offering a potential return of 11.45% for each year held.

The plan with the 105% maturity trigger level is Option 3 the same 10:10 Plan and provides a potential return of 14% for each year held.

The counterparty for the April 2020 10:10 Plan is Goldman Sachs International, and all options have a 70% capital protection barrier which again, is only observed at the end of the 10-year term if the plan has not matured early.

Plan Manager Walker Crips Mariana Capital Mariana Capital Walker Crips
Plan Name UK 95% Kick-out Plan Issue 7 10:10 Plan April 2020 (Option 2) 10:10 Plan April 2020 (Option 3) UK 7Y Step Down Kick-out Plan (April 2020)
Underlying FTSE 100 Index FTSE 100 Index FTSE 100 Index FTSE 100 Index
Potential Returns 8% for each year held 11.25% for each year held 14% for each year held 7% for each year held
Maximum Term 7 years 10 years 10 years 7 years
Autocall Periodicity Annual from year 2 Annual from year 2 Annual from year 2 Annual from year 2
Autocall Reference Levels 95% throughout 100% throughout 105% throughout 100%, 100%, 95%, 90%, 85%, 80%
Counterparty Morgan Stanley & Co. International Plc Goldman Sachs International Goldman Sachs International HSBC Bank Plc
End-of-term Capital Protection Barrier 60% (allowing for up to a 40% fall) 70% (allowing for up to a 30% fall) 70% (allowing for up to a 30% fall) 60% (allowing for up to a 40% fall)
Closing Date 27/03/2020 02/04/2020 02/04/2020 03/04/2020
Strike Date 03/04/2020 09/04/2020 09/04/2020 09/04/2020

The fourth plan (the Walker Crips UK 7Y Step Down Kick-out Plan April 2020) has been selected as a diversifier for both counterparty and maturity trigger purposes - just in case the FTSE 100 Index performs poorly over the medium term. The plan can still mature positively at the end of seven years, even if the FTSE 100 index is up to 20% lower over the term. The defensive nature of this product has resulted in a lower potential coupon of 7% for each year held. The capital protection barrier is at 60%, which is only observed at the end of the 7 years, should the product fail to mature on any of the annual observation dates.

For all of these investments, if the performance of the FTSE If the underlying index (the FTSE 100 Index is such that an early maturity is not triggered and at the end of the term the capital protection barrier has been breached investors will suffer a loss equal to the percentage fall in the index over the term. It also needs to be appreciated that the returns including the return of capital are dependent upon the relevant counterparty meeting their obligations and in the event of a banks failure a significant loss is likely.

The Lowes UK Defined Strategy Fund (UKDSF) might also be considered as a diversifier given it provides exposure to a basket of similar strategies selected by the experienced team here at Lowes, offering improved liquidity and discretionary management. As of February 2020, the fund includes 20 autocall strategies, all utilising the FTSE 100 Index as the underlying; whilst diversifying kick-out reference levels and counterparties used in order to reduce volatility when compared to that of the underlying index.

The content of this article is for your general information and use only and is not intended to address your particular requirements. The article should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice.

Structured investments put capital at risk.

Past performance is not a guide to the future.

Disclosure of interests: Lowes has provided input into the concept, development, promotion and distribution of the 8:8, 10:10, and is investment manager for Lowes UK Defined Strategy Fund. Lowes has a commercial interest in these investments as a result of its involvement. Where Lowes is involved in advice on these investments to retail clients, it will not receive benefit of any fees for its involvement, other than those fees payable by the client to Lowes. Lowes has robust systems and controls in place to ensure that it manages any actual or potential conflicts of interests in its activities.
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