Maturing Stock market-linked bonds have lost up to 67% of their capital but providers say many products have offered high income levels
Maturing stock market-linked bonds, that aim to provide downside protection have lost investors as much as 67% of their capital as the indices to which they are linked have fallen. Many of these products offered high income levels throughout the term of the product yet most of the focus is on capital returns, something product providers believe is unfair.
According to analysis provided by Chartwell and Investment Week sister publication, Protected Investment Plans, bonds from Canada Life, NPI, Scottish Mutual and Eurolife matured with the indices to which they are linked down from their starting positions, resulting in sharp capital losses.
The structured plans often incorporated a one-for-one loss but, for some, the plans included a three-for-one loss on the returns from the index.
Canada Life's High Income Bond 2 plan, for example, was linked to the Eurostoxx 50 and matured on 12 December 2002. Conditions on the product stated the index must recover to the starting level and if not, the first 10% drop equals a three-for-one loss and anything thereafter a one-for-one loss. According to Chartwell, based on an end index level of 2467.57 from a starting position of 4679.74, this would have lost investors 67.27% of capital.
Other bonds that matured recently also provided capital losses. Eurolife's three-year Pep Plus plan, which matured in April 2002 and was linked to the FTSE 100, saw investors lose 18% of their capital invested for example. On the NPI High Income Bond, also linked to the FTSE and matured in June 2002, investors lost 33%.
Scottish Mutual's two Eurostoxx 50-linked bond products, Income Bond 7 and Income Bond 8, matured in October and December last year having lost investors 38.37% and 42.7% of their original investment.
An investment in the worst UK All Companies fund over a three-year period, offering no downside protection, would have fallen 80.9% but the best performer over that period would have returned a gain of 11%.
With global indices still under pressure and the FTSE hitting eight-year lows towards the end of January, there are still a number of these types of products that will mature with their linked indices a long way off from their starting levels.
As evidenced in the table, the Eurostoxx 50, FTSE 100, S&P 500 and Nasdaq all need to rise by between 27% and 182% before the plans mature if investors are to preserve their capital.
Most of the products featured in the table will mature this year or next and, with the large rises needed, it would appear the loss of capital is almost inevitable.
However, market commentators note figures such as those featured in the table do not reveal the whole story behind protected products.
Stephen Tsu, executive director, strategic development, Canada Life, said reports in the press lack proportion. 'Communication is important and we were in contact with intermediaries before the tranche of High Income Bond 2 came up to let them know what the situation was.' he said.
Tsu added that at around the same time that the High Income Bond matured, a Growth Bond linked to the FTSE also matured with a return of £120 per £100 invested. 'Strangely this very good result did not make the newspapers,' he noted.
Mark Whittet, a spokesman for Scottish Life, agrees the chart does not show the whole story. 'It is a matter of regret the Scottish Life International Income and Growth Bonus Bond 1 will not see a 100% capital return but, as the name suggests, there is an income element to the product,' he said. 'The fact this is not always factored in to give an overall return is a thorn in the side of providers.'
Graham Devile from Nvesta believes the press has a tendency to concentrate on the capital retained. 'When it comes to structured products, the press ignores the growth or income element and just looks at the capital,' he said.
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