Investment Focus: SIP Nordic FTSE 3 / FTSE 100 Defensive Kick Out Plan
Fixed term investment plans that have the ability to mature early or ‘kick out’ each year seem to be popular whatever the investment climate, but particularly so when the stock market is at historically high levels. The FTSE 3 / FTSE 100 Defensive Kick Out Plan is an innovative new launch offering the highest rate of any kick out investment where the return of capital is based on the performance of the FTSE 100 Index. We take a closer look at the plan’s features and review the risk versus reward on offer to see why this might make for an attractive opportunity in the current investment climate.
In a nutshell
The FTSE 3 / FTSE 100 Defensive Kick Out Plan from SIP Nordic has a maximum term of five years but offers the opportunity to mature early or ‘kick out’ after 12 months, and then at the end of each quarter thereafter, dependent on the performance of three FTSE 100 listed shares. If the plan kicks out, you will receive 12% at the end of year one, or 12% plus an additional 3% for each quarter the plan has been active thereafter (not compounded). If no growth payment is achieved, the return of your capital is dependent on the performance of the FTSE 100 Index rather than the three shares and your capital is at risk if the Index falls by 40% or more below its starting value.
The term ‘kick out’ refers to the ability of the investment plan to mature early which is dependent on the performance of three shares listed on the FTSE 100 Index: AstraZenica plc, Barclays plc and BHP Billiton plc. Fixed term investment plans that have the ability to mature early and provide a competitive return have proved popular in all types of markets but the fact that investors can achieve high investment returns even if the underlying investment stays relatively flat can be an appealing feature when markets are at historically high levels. This plan offers regular opportunities to kick out, initially after the first twelve months and then every three months thereafter.
The value of each share is taken at the start of the plan and is then compared to the value after 12 months, and then at the end of every quarter thereafter. Should the value of all three shares be at or above 95% of their value at the start of the plan, your investment will kick out providing a 12% return at the end of year one, or 12% plus 3% for each additional quarter 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 5% and the plan will still provide an investment return.
Some capital protection from a falling market
If one or more shares have fallen by more than 5% at each measurement date, the plan will not produce a return. However, the return of your initial investment is dependent on the FTSE 100 Index rather than the performance of the three shares.
The FTSE 3 / FTSE 100 Defensive Kick Out Plan contains what is known as conditional capital protection which means that your initial capital is returned in full provided the FTSE 100 Index has not fallen by 40% or more below its starting value. This is measured at the end of the five year term only. If the Index is below this level, you will lose 1% of capital for every 1% the Index has fallen below the starting level. It should be noted that in this scenario at least 40% of your capital will be lost and as such, this investment is only appropriate for those investors willing to accept the risk that they may lose some or all of their initial capital.
Defined risk and defined returns
When considering investment options it is important to understand the balance of risk versus reward. Inevitably, the opportunity to receive higher returns requires the investor to put their capital at risk. 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 on offer as well as a return of your initial investment.
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 £5,000.
Fair Investment conclusion
Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “The headline return on offer from this plan is high when compared with other kick out investment plans however it is important investors look carefully at the risks involved. Any growth return is dependent on the performance of three shares and is therefore higher risk than a plan based on the FTSE 100 Index. This should certainly be a key consideration and investors should also note that all three shares need to meet the required level for the plan to produce an investment return.”
He continued: “The plan does though offer a return of capital dependent on the performance of the FTSE 100 Index rather than the three shares and as such, could offer a compelling balance of risk versus reward for those investors prepared to take on an increased level of risk in the hunt for double digit returns.”
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 the FTSE 100 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 the FTSE 100 Index and shares listed on the FTSE 100 Index is not a guide to their future performance.