With the FTSE 100 at its current levels, investors considering their options are often split down the middle – on the one side are those who feel confident that the Index can break through the 7,000 point barrier and keep going, and then there are those on the other side who remain uncertain that the market can continue to rise. With this in mind, we take a look at a newly launched investment plan that aims to cover both eventualities, in order to find out whether this could make for an attractive opportunity in the current investment climate.
New launch
Investors looking to gain a broad exposure to the UK stock market often look to investments linked to the performance of the FTSE 100 Index. But with the Index continuing its run at historically high levels, many investors are finding it difficult to decide if now is a good time to invest or not.
For those who think that the market may either stay relatively flat or will go up in the medium term, the FTSE Kick Out Supertracker from Start Point Investments offers investors two opportunities for competitive returns.
In a nutshell
The first opportunity is for the investment to mature early or ‘kick out’ at the end of the third year. The investment will kick out if the value of the FTSE at the end of the third year is higher than its value at the start of the plan. If it is, you either receive a fixed return of 21% or, the percentage rise of the Index if greater than 21%. This is the ‘Kick Out’ part of the investment.
The second opportunity arises at the end of the plan if it has not already kicked out. Your return is then equivalent to three times any rise in the Index over the six year term, capped at 75% of your original investment. This is the ‘Supertracker’ part of the investment.
Proving popular
The FTSE Kick Out Supertracker has proved popular so far with both existing customers and new investors. With the FTSE continuing above 6,000 points for all of 2013, many of our existing customers had investments that have matured early, providing them with attractive returns as well as the opportunity to consider new investment opportunities.
For new investors, the headline rate of 21% after three years or the potential for up to 75% at the end of the term is also proving a compelling opportunity in the current investment climate – so how does the investment work?
Early maturity
Plans that have the ability to mature early and provide a competitive return on your capital have proved popular with investors in all types of markets. This investment offers a kick out opportunity after three years where a fixed return of 21% is achieved if the FTSE is at or above its value at the start of the plan.
Therefore, the Index can stay the same or only increase by a small amount in order to generate these returns. So if you are uncertain that the FTSE will continue to rise but would like the opportunity to receive 7% for each year invested (not compounded) even if the market stays flat, this could be an attractive opportunity.
Further, if the value of the Index has risen by more than 21% over the three years, you will receive a percentage return equivalent to this higher amount. So if you are confident that the market will rise over the next three years and would like to capture that growth, without a cap on your overall return, this could also provide a compelling opportunity. In both cases, you also receive a return of original capital.
Supertracker
The term ‘Supertracker’ in the plan title refers to what happens if the investment does not mature after three years. In the event the FTSE is lower than its starting value at the three year point, the plan continues for a further three years. After this time your investment ends and your return is based on three times any rise in the FTSE over the full six year term; for example, if the Index has risen by 20%, your return will be 60% of your original investment (plus a return of your original capital).
The Supertracker element of the plan therefore provides the investor with the potential for enhanced returns since it multiplies any rise in the Index by three, subject to a cap on the total growth return available. This maximum is set at 75% and so if the FTSE rises by more than 25% over the term your growth is capped. If the FTSE is lower than its starting value you will not receive any return on your original investment.
Some protection from a falling market
If your investment matures after three years, your initial investment is returned to you along with either 21% or the percentage rise in the Index if greater. Should the investment continue for the full six years and the FTSE is higher, you receive a return as described above, along with a return of your initial investment.
However, at this point if the Index finish lower than its starting value, you will not receive any growth on your investment and your return of capital is dependent on the performance of the FTSE. Provided the Index has not fallen by more than 40% of its starting value, you will receive a return of your original investment. This is known as conditional capital protection and offers investors some protection against a falling market.
Should the FTSE finish below this 40% barrier, your initial investment will be reduced by 1% for every 1% fall in the Index at the end of the plan. In this situation at least 40% of your capital would be lost and so prior to investing, you should be willing to accept the risk that you could lose some or all of your initial capital.
Defined risk and defined returns
One of the features of this investment is that the potential returns are stated up front, prior to investing. This allows the investor to consider the potential upside in the context of the amount of risk they are taking since you know at the outset exactly what needs to happen in order to receive the returns as well as a return of your initial investment.
Credit ratings and agencies
Unlike a fund, your investment is used to purchase securities issued by global bank BNP Paribas (known as the counterparty) and so their ability to be able to meet their financial obligations become an important consideration. This is known as credit risk and means that in the event of BNP Paribas going into liquidation, you could lose any future returns as well as some or all of your initial investment. These investments are not covered by the Financial Services Compensation Scheme for default alone.
One accepted method of determining credit worthiness of a company 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 rating agency and as at 1st January 2014, BNP Paribas has been attributed an ‘A+‘ rating with a negative outlook. The ‘A’ rating denotes a strong capacity to meet its financial commitments but could be more susceptible to adverse economic conditions than companies in higher-rated categories while the ‘+‘ signifies it is at the higher end of this rating grade. The negative outlook indicates that the rating may be lowered in the short to medium term (between 6 months to 2 years).
BNP Paribas profile
The BNP Paribas Group is a leading banking and financial services in Europe. The three main activities of BNP Paribas are Retail Banking, Corporate and Investment Banking and Investment Solutions, the latter including a wide range of savings and investment products. These areas are complimentary offering strategic strength from a well-balanced and diversified business model which has served them well through the recent banking and global economic crisis, evidenced by a comparatively strong and stable credit rating.
BNP Paribas is one of the world’s largest banking groups and features fourth in the European league table based on assets and ranks third based on market capitalization (source, SNL Financial, 2013).
Key Figures
As at 31st December 2012, BNP Paribas employed around 188,600 people. With locations in almost 80 countries around the world, BNP Paribas is a truly global banking giant, servicing 22 million retail customers and 216,000 corporate clients. Their revenue for 2012 was €39,072 million.
BNP Paribas has had a presence in the UK for nearly 150 years. The UK is a key hub for the Group and all three of BNP Paribas’ core businesses are based here. There are around 8,000 employees in the UK.
The potential to beat the market
Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “With the FTSE 100 Index currently at historically high levels, it is understandable why many investors are thinking carefully before committing their capital. Depending on your view of what will happen to the FTSE, the ability to provide high returns even if the index stays the same or only goes up a little is clearly an attractive proposition in the current climate. In these two scenarios this investment offers the potential to beat the market.”
He continued: “For those who wish to achieve high returns if the FTSE rises significantly, then this investment also offers two opportunities to do so and although there is a cap on the maximum return available if the plan runs the full term, this is partly the trade off for the conditional capital protection available. On balance, in the current investment climate this plans offers a compelling balance of risk v reward.”
The plan is open for new ISA investments (2013/14 allowance of £11,520) ISA transfers and non-ISA investments.
Click here for more information about the Start Point FTSE Kick Out Supertracker Plan »
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 may change.
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. There is a risk of losing some or all of your initial investment. 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 the FTSE 100 Index is not a guide to its future performance.
