19 June 2008

A win-win investment opportunity that is 100% capital protected

By Andy Pennie, Marketing Director, James Hay

It's a truism that the time to invest is when a market is low or a sector undervalued, but those same conditions tend to worry most individual investors (and not a few professionals) – who are more likely to keep their capital in cash and out of the markets until renewed activity is well under way and much of the opportunity has been missed.

Pension investors in particular are generally unwilling to go for recovery situations – especially those near to retirement, who are more usually inclined, even in relatively stable times, to quit equity investment altogether to protect the value of their benefits in the run-up to pension age.

Structured products can offer a way for these investors to participate in potential market growth while safeguarding their capital. By employing a combination of derivatives to capture returns – and other financial instruments to provide the appropriate protection – they allow investors to enjoy most or even all of the fruits of a market opportunity without the need to risk the value of their capital by investing directly in equities.

James Hay's Selected UK Banking Plan, which we launched on 16 June (at the same time as this product was launched by Cater Allen Private Bank), gives investors the opportunity to capitalise on the future growth potential of UK bank shares as the sector emerges from its present depressed position in the wake of the US sub-prime mortgage crisis, but with 100% protection of their capital at maturity.

Returns will reflect the performance of a basket of 4 leading bank stocks – Barclays, HSBC, Lloyds TSB and Royal Bank of Scotland – during the next 5 years. The Plan has a 5 year term from the investment 'strike' date of 14th August 2008, at the end of which investors will receive back the whole of their original investment plus the averaged growth achieved by the shares in the basket over the period.

However, that is not the entire story. Another attraction of the Plan for investors will be that it is capable of an early maturity at an earlier anniversary – for a full return of capital plus a fixed payment that will be equivalent to a return of 13% (not compounded) for every year it has run before the early maturity.

Progress of the shares in the basket will be monitored at an observation date shortly before each Plan anniversary from the first to the fourth years (ie 2009 to 2012). If all four stocks have risen in value since the start of the Plan then it will mature early at the anniversary date. The total maturity value payable would be 113% of the initial investment on maturity at the end of Year One, 126% if it occurs at the end of Year Two, 139% in Year Three, or 152% in Year Four.

These represent very attractive rates of potential return for a capital secure investment in today's market – not only for pension investors, for whom the returns will be tax-free, but also for investors whose gains will be liable to income tax in the usual way. And they should remain attractive, even if interest rates available in the market do rise as is being predicted in some quarters.

Probably, the 'dream scenario' for many investors in the Plan would be for the four target stocks to bobble around at their current levels for the first 3 years, before rising to trigger early maturity and a 152% payout in the 4th year. However, given that banking shares are widely perceived as significantly undervalued in relation to their asset strength, current earnings and future earnings potential, it seems likely that investors could reasonably expect their Plans to mature sooner, rather than later (but this is not guaranteed). While this outcome would limit their total return, it would tend to indicate greater activity in the investment markets and the likelihood of alternative reinvestment opportunities for their money.

Although the current economic outlook, with its prospects of higher interest rates and a general slowing of the economy to reduce inflation, can be expected to have a limiting effect on equities generally, many will consider that banks are probably in a better position than most to cope well with such circumstances. While their shares are undervalued to a substantial degree, all the major banks have carried out significant restructuring and are responding to the lessons of the recent past by accepting only higher quality loan business. And, in contrast to other businesses, banks are more likely to profit from higher interest rates than to be harmed by them. So, all-in-all, this scenario tends to suggest that for anyone seeking to invest between £10,000 and £1 million, the Selected UK Banking Plan could represent a very attractive opportunity that is well-worth consideration The offer is open to all investors, including James Hay SIPP and Wrap holders, and will close on 28 July 2008.

For more information about the James Hay Selected UK Banking Plan, please go to www.JamesHayStructuredProducts.co.uk

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