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Happy 2nd Birthday FTSE CSDI - 13/07/2022

1st July marked the second anniversary of the FTSE CSDI (Custom 100 Synthetic 3.5% Dividend Index).

The index was developed as an underlying for structured products by FTSE Russell, who also calculate and publish the FTSE 100 Index. The FTSE CSDI tracks the same 100 shares as the FTSE 100, in the same proportions but unlike the FTSE 100 the CSDI includes the benefit of the dividends paid by the companies (which have historically averaged around 3.5% per annum), and then deducts the equivalent to a fixed 3.5% dividend per annum, on a daily basis.

The benefit to the issuer of utilsing the index is that the issuing bank does not need to predict the level of dividends that will be produced throughout the term. Whilst the risk of variability is in turn accepted by the end investor to a degree, they benefit from the margin the issuer would otherwise have included to cover any shortfall in their predictions.

From a returns perspective the FTSE CSDI will perform almost identically to the FTSE 100 if dividends are at 3.5% pa, moderately underperform if they are less, and moderately overperform if they are more. Whilst the CSDI is quoted daily, the FTSE 100 Index serves as an approximate proxy as to performance.

The following from Mariana and Bloomberg illustrates the performance of the CSDI relative to the FTSE 100 Index since 1st July 2020.

2 Years (01/07/2020 - 30/06/2022) 1 Year (01/07/2021 - 30/06/2022)
FTSE 100 Index +16.42% +0.62%
FTSE CSDI +15.53% +0.66%
CSDI / UKX Correlation* 99.95% 99.65%
* This is based on simple return correlation not log return correlation.

The implied dividend yield of the FTSE 100 for 2022 is 3.25%; slightly below the 3.5% fixed dividend of CSDI (Bloomberg, 10th June 2022).

To provide an indication as to the uplift that utilsing the CSDI can bring when pricing the 10:10 Plan August 2022, Mariana obtained pricing for both the FTSE 100 and CSDI which showed an uplift in coupons of 1.3% to 2.4% per annum:

10:10 Option 1 8.25% 6.93%
10:10 Option 2 10.25% 8.11%
10:10 Option 3 12.25% 9.84%
Source: Morgan Stanley pricing 06/06/2022

The first structured investments that utilised the CSDI are on track to mature this November – as indeed would have been the case had they been linked to the FTSE 100 Index but with a higher total return.

Full details of the latest 10:10 Plan, which is linked to the CSDI, can be found here.

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 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.
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