With the potential for a high headline growth return, the latest version of this popular plan from Mariana offers those investors with a higher risk appetite, the potential for greater reward. In addition, this innovative investment plan combines the ability to mature early or ‘kick out’, along with the opportunity for a ‘consolation’ fixed return if the plan fails to mature. Here we take a closer look at the plan’s main features in order to better understand the risk versus reward on offer.
Plan snapshot
The 3 Stock Defensive Consolation Kick Out Plan has a maximum term of six years but offers the opportunity to mature early, or ‘kick out’, after just 12 months, and then at the end of each six months thereafter, dependent on the performance of three technology shares. If the plan kicks out, you will receive 14.50% at the end of year one, or 14.50% plus an additional 7.25% for each six months thereafter (not compounded). If the plan fails to kick out, there is also the opportunity for a ‘consolation’ return of 32% at the end of the fixed term, whilst the return of your capital is also dependent on the performance of the same three shares with your capital being at risk if any of them has fallen by more 50% at the end of the term, in which case you could lose some or all of your initial investment.
‘3 Stock’
Both the investment growth and the return of your initial capital are dependent on the performance of 3 shares. The three shares are well known technology businesses Apple Inc, Microsoft Corp and Intel Corp, all of which are listed on the NASDAQ stock exchange, the second largest stock exchange in the world. The closing levels of the shares are taken at the start of the plan and are then measured at regular intervals thereafter, known as kick out observation dates.
‘Kick Out’
The term ‘kick out’ refers to the ability of the plan to mature early, before the end of the maximum fixed term, or at the end of the plan, i.e. on any of the kick out observation dates, the first occurring after 12 months, and then every six months thereafter. On any such date, should all three shares be at or above the required level, the plan will kick out. If one or more of the shares end below the required level, the plan continues to the next observation date.
‘Defensive’
In determining whether the plan will kick out or not, the value of each share is taken at each kick out observation date and then compared with its value at the start of the plan. Should the value of all three shares be at or above 90% of their value at the start of the plan, your investment will kick out providing a 14.50% return at the end of year one, or 14.50% plus 7.25% for each additional six months invested thereafter (not compounded). This growth payment is made along with a return of your initial investment. The ‘defensive’ element to the plan refers to each share being able to fall up to 10% and the plan will still provide the investment return.
‘Consolation’ return
If the investment fails to kick out either during the plan or at the end of the fixed term, there is also the opportunity to receive a 32% fixed return, along with a return of your initial investment. This ‘consolation’ return is paid provided none of the shares has fallen by more than 50%, i.e. all three shares must end at or above 50% of their value at the start of the plan. If one or more shares have fallen by more than 50%, your capital is at risk.
Some capital protection from falling share prices
If the plan fails to kick out the return of your initial capital is also dependent on the same three shares. On the final day of your investment, should the value of the lowest performing share be less than 50% of its value at the start of the plan, your initial capital will be reduced by 1% for each 1% fall. If should be noted that in this situation, you would lose at least 50% of your initial capital, so although the 50% barrier provides some capital protection from falling share prices, there is the risk that you could lose some or all of your initial capital.
Higher risk
Therefore, the most important feature of this investment plan to consider is that the potential returns on offer, as well as what happens to your initial investment, are both dependent on the performance of shares rather than any stock market index. This makes it a higher risk investment as your growth return is dependent on the performance of individual shares rather than a broader exposure to the stock market as a whole offered by an index (such as the NASDAQ). In addition, this plan focuses on shares within the technology sector which can be volatile. These two factors should be carefully considered.
Greater rewards
The principle of risk versus reward means that the upside of taking on more risk is that the potential rewards are greater, which is indeed the case with this investment. The headline returns are high compared to those on offer from other kick out investments based on the performance of stock market indices. This investment therefore offers the potential for greater rewards than would be on offer if the plan was dependent on the performance of the NASDAQ Index.
Back testing: how the plan would have performed historically
Back testing is statistical research which uses hypothetical products with identical terms to this investment plan and considers how they would have performed over a 15 year period had they been launched since October 1994, giving a total of 3,915 different hypothetical products. This analysis shows that a kick out occurred in 81.2% of scenarios, did not occur but investors received a full return of capital in 13.8% of scenarios and at least 50% of investor’s initial capital was lost in the remaining 5.0% of occasions.
Please note that this analysis is simulated and has no bearing on how this plan will perform in the future, actual performance may produce significantly different results. It is not a reliable indicator of future performance and should not be used to assess the risks associated with the plan.
Commerzbank as counterparty
Structured investment plans use your investment to purchase securities issued by Commerzbank and so their ability to be able to meet their financial obligations becomes an important consideration. This is known as counterparty risk (or credit risk) and means that in the event of Commerzbank going into liquidation, you could lose some or all of your initial investment as well as the payment of any growth return. In this event you would not be entitled, for this reason alone, to compensation from the Financial Services Compensation Scheme (the ‘FSCS’).
Credit ratings and agencies
One accepted method of determining the credit worthiness of a counterparty is to look at credit ratings issued and regularly reviewed by independent companies known as ratings agencies. Standard and Poor’s is a leading credit ratings agency and as at 19th October 2015, Commerzbank has been attributed a ‘BBB+‘ rating with a negative outlook. The ‘BBB’ rating denotes a good capacity to meet its financial commitments and repay debts but could be more susceptible to adverse economic conditions than companies in higher-rated categories, whilst the ‘+’ signifies it is at the higher end of the rating grade. The negative outlook indicates that the rating may be lowered in the short to medium term (between 6 months to 2 years).
ISA friendly
In addition to non-ISA investments, this plan also accepts Cash ISA and Stocks & Shares ISA transfers as well as New ISA investments (current tax year limit of £15,240). The minimum investment is £15,000.
Fair Investment conclusion
Oliver Roylance-Smith, head of savings and investments at Fair Investment Company, commented on the plan: “The headline returns on offer from this plan are some of the highest currently available from any kick out investment. But with the potential for such high investment returns it is crucial that investors look carefully at the risks involved. For example, any growth return is dependent on the performance of three NASDAQ-listed shares and is therefore higher risk than a plan based on the NASDAQ Index, whilst the technology sector can be volatile. These should be key considerations. Investors should also note that all three shares need to meet the required level for the plan to produce an investment return.”
In conclusion, he said: “This plan may however appeal to investors prepared to take on a higher level of risk in return for higher potential rewards, whilst the 32% consolation return provides an innovative addition, and the 50% barrier offers some protection against falling share prices.”
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No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek professional advice.
Tax treatment depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.
This is a structured investment plan that is not capital protected and is not covered by the Financial Services Compensation Scheme (FSCS) for default alone. Any return on your investment is not guaranteed and as shares prices can move by a wide margin plans based on the performance of shares represent a higher risk investment than those based on indices as a whole. There is a risk of losing some or all of your initial investment due to the performance of three shares listed on the NASDAQ Index. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of shares listed on the NASDAQ is not a guide to their future performance.