CompareStructuredProducts.com - 07/10/2020
As explained in our previous article, Introducing the FTSE Custom 100 Synthetic 3.5% Dividend Index, this year has seen companies slash their dividends in response to the COVID-19 crisis, not least FTSE 100 companies. This impacts the potential returns that the counterparties behind structured products are able to offer on FTSE 100 linked plans. These returns are reduced by the banks erring on the side of caution due to difficulties in forecasting.
In response, FTSE Russell, the same agent that calculates and publishes data for the FTSE 100 Index, have released an alternative index designed to be a more efficient underlying asset for structured products to act as a proxy for the FTSE 100. This index gives exposure to the same market without changing the stocks’ weightings – the FTSE Custom 100 Synthetic 3.5% Dividend Index (FTSE CSDI).
The FTSE CSDI is an alternative to the FTSE 100 Index that is expected to perform in a similar way, through a two-step approach.
1. It takes the level of the FTSE 100 Synthetic Index, another FTSE Russell index, which has similar returns to those of the FTSE 100 Total Return index – reflecting both the performance in share prices and any dividend income paid.
2. In order to align its performance more closely with that of the FTSE 100 (price only), an annual fixed ‘dividend’ of 3.5% is deducted; the historical 20-year average dividend yield of the FTSE 100 companies is approximately 3.5%1. The performance of the FTSE CSDI and FTSE 100 Index are closely correlated, and they are expected to remain similar, however not identical. If the average annual dividend yield from the 100 companies falls below the fixed 3.5% drawdown of the FTSE CSDI, the FTSE 100 will outperform the custom index; and vice versa.
Designed in such a way as to aim to broadly follow the price only performance of the FTSE 100 Index, and achieve equivalent exposure to the stock market, we believe that the FTSE CSDI offers investors ample uplift on the potential returns from FTSE 100 plans to justify replacing the latter as the underlying for the Mariana Capital 10:10 Plan, and also as the sector’s preferred index going forward.
In addition to the FTSE CSDI, there have been a number of custom indices, centered around the UK stock market, created and utilised in plans in recent years and here, we discuss them and the differences.
The FTSE 100 Fixed Dividend Equal Weight Custom Index (FDEW) has been used in a number of plans since November 2017. This index has two fundamental differences to the FTSE CDSI. First, it bases its performance on the total returns of the companies that make up the FTSE 100 Index but rather than being weighted according to market capitalisation, the FDEW attributes an equal weighting to each of the 100 shares; investors in the FDEW are, in theory exposed to each share by 1%. However, in reality the equal weighting of the shares is assessed and rebalanced accordingly on a quarterly basis, so equal exposure to each company is not consistent and may stray over a three-month period before being reset. The high dividend paying stocks are typically those with high market cap, so the dividend benefit of an equal weighted index is likely to be lower.
The other significant difference is the dividend ‘drawn’ from the equivalent total return. The CSDI draws a ‘dividend’ equivalent to 3.5% per annum and this moves with the value of the index whereas the FDEW deducts a fixed 50 index points. The 50 points was decided on at inception as it would represent 5% of the index if the index is at 1,000 points. When the index is lower, as is currently the case, the effect of this dividend draw is more than 5% and as such, significantly more than the dividends produced. Whilst this will translate to a provider being able to offer high returns on relevant products this is, in part, a function of the fact that the index performance will be dragged down by the fixed dividend draw.
The FTSE 150 Equally Weighted Discounted Return Custom Index, again, is an equally weighted total return index that rebalances on a quarterly basis, in the same way as the FDEW. However, the performance of this index is not just based on the FTSE 100 index, it also includes the top 50 companies within the FTSE 250 Index. Thereby granting a weight of 0.667% to each company within the index. Much like both the FTSE CSDI and FDEW, there is an annualised decrement subtracted from the index every year. In the case of this index, there is a 5% drawdown – 1.5% higher than the 3.5% 20-year average dividend yield of the FTSE 100 companies and somewhat higher than the dividend yield of the equally weighted 150 companies.
In summary, the main similarities and differences between the FTSE Custom 100 Synthetic 3.5% Fixed Dividend Index, FTSE 100 Fixed Dividend Equal Weight Custom Index and FTSE 150 Equally Weighted Discounted Return Custom Index are as below2.
|FTSE Custom 100 Synthetic 3.5% Fixed Dividend Index||FTSE 100 Fixed Dividend Equal Weight Custom Index||FTSE 150 Equally Weighted Discounted Return Custom Index|
|Based on a synthetic FTSE 100 Index which in turn aims to replicate the total returns of the FTSE 100 as closely as possible||Based on the total returns of the 100 shares in the FTSE 100||Based on the total returns of the 100 shares in the FTSE Index, plus the 50 shares with the highest market capitalisation listed on the FTSE 250 Index|
|Synthetic index, aims to replicate the total returns of a market cap weighted FTSE 100 Index||Equally weighted share index, rebalanced on a quarterly basis||Equally weighted share index, rebalanced on a quarterly basis|
|Annual equivalent ‘dividend’ of 3.5% of index value deducted on an ongoing basis||Fixed ‘dividend’ of 50 index points deducted on an ongoing basis||Annual equivalent ‘dividend’ of 5% deducted on an ongoing basis|
The latest tranche of the Mariana Capital 10:10 Plans (November 2020 edition), utilises the FTSE CSDI. For more details on the 10:10 Plan, or FTSE CSDI, please refer to the product literature here..Source: Mariana Capital .Source: FTSE Russell Structured investments put capital at risk. Past performance is not a guide to future performance. Disclosure of interests: Lowes has provided input into the concept, development, promotion and distribution of the 10:10. 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.