Structured investments known as kick-outs allow investments in fixed term plans which can mature early, returning a defined level of interest, if certain conditions are met.

Also known as ‘auto-call’ or early closure, this feature is built into structured investments by creating certain criteria which, if met, will mean that a  plan will automatically mature early, before the end of its fixed term.

For example, the Investec FTSE 100 Enhanced Kick Out Plan 20 is a five year plan that can mature after one, two, three or four years if at the anniversary of the plan start date the level of the FTSE 100 is higher than it was at the starting level.

The plan is due to start on 20 June 2011, so after one year, on 20 June 2012 the plan could mature. This would only happen if the average closing level of the FTSE 100 in the five business days leading up to and including 20 June 2012 is higher than the closing level of the FTSE 100 on 20 June 2011.

The same applies for subsequent anniversary dates, and if the plan does mature early 10.75 per cent is returned for each year the plan has been in force. This return is not compounded. For example, if the plan matures after two years the return level is 21.50 per cent.

The nature of a structured investment means parameters such as this early maturity feature can be built in at the beginning of the plan.

What happens if the plan does not kick-out

The above plan will run for the full five years, if the kick out criteria is not met. After five years the level of return will be 1.2 times any growth of the FTSE 100. This return is not capped.

This means that investors who think the FTSE will only grow moderately over the next few years, and could see significant volatility, may consider this type of plan as it offers the potential for a defined return linked to the FTSE 100, without full exposure to the ups and downs of the index.

For a snapshot of how the FTSE performed in 2010, the closing level on the first day of trading was 5522.50 with the final closing level at the end of the year: 5899.94. Although the overall trend was upward, there were a few significant ups and downs, with the index falling to 4916.87 at one point. It should always be remembered that past performance is not a guide to future performance.

Taking measured risk

Associate director at Fair Investment Company, Oliver Roylance-Smith, describes structured investments as a good option for investors willing to accept some risk to their capital, in exchange for a competitive potential return.

“Although structured investments cannot offer full exposure to the performance of a market, they offer potentially higher returns than cash investments, and the opportunity to exceed inflation, but avoiding the day to day volatility of markets.

“Returns on many plans are classed as capital gains meaning the capital gains tax (CGT) allowance can be utilised, while the investments are normally allowable investments for tax efficient wrappers like ISAs and SIPPs.”

Capital risk

Investing directly in stocks and shares means capital is exposed to the volatility in the market, with potential to fall as well as rise. Structured investments will generally offer what is called ‘soft protection’ for capital.

In the case of the Investec FTSE 100 Enhanced Kick Out Plan 20 this soft protection is the fact that capital will only be at risk if the FTSE 100 Index has fallen by more than 50 per cent during the term of the plan and what is called the ‘Final Index level’ (the average of the closing levels of the FTSE 100 Index during the last 6 months of the plan) is lower than the initial index level.

If this average level is not less than 50 per cent compared to the the starting level of the FTSE 100 then all capital invested will be returned.

Structuring

Kick-out plans offer exposure to the growth of an index but within the structure of a defined plan, while offering the potential for early returns. This is different to a conventional structured investment that is designed to offer a potential return after the full plan term, such as five or six years.

Charges are built into a structured investment and taken into account at the outset, so no additional charges are applicable in kick-out plans.
 
See Investec FTSE 100 Enhanced Kick Out Plan 20 for more information.

Other kick-out plans currently available through Fair Investment Company include the Investec FTSE 100 Kick-Out Deposit Plan 20, which is a deposit plan offering a lower level of potential return but greater capital protection.

No news, feature article or comment should be seen as a personal recommendation to invest. Different types of investment carry different levels of risk and may not be suitable for all investors.

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 independent financial advice.

© Fair Investment Company Ltd