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Constructing a defensive mini portfolio of FTSE 100 linked structured products


Colin Mclachlan
Lowes Financial Management Technician

Blending a few different structured products together in a mini portfolio can potentially enhance returns whilst reducing the risks involved. Looking at products currently available on the market, there are several plans which can be combined into a mini portfolio with a view to producing a better potential outcome than when investing in a single product alone, whilst at the same time diversifying counterparty exposure.

The Meteor FTSE Defensive Supertracker Plan May 2017 Issue 2 is a six year investment, offering two times the rise in the FTSE 100 Index, from 75% of its Initial Index Level, capped at a maximum gain of 55% which means that the plan will achieve its maximum gain if the FTSE 100 Index rises by only 2.5% over the term. The downside market protection for the Meteor product is such that it will only give rise to a loss from market movements, at maturity if the FTSE is down by more than 40% at the end of the term. The counterparty to the investment is BNP Paribas, rated at ‘A’ by Standard & Poor’s, which indicates that they have a strong capacity to meet their financial commitments.

A further proposition to add to the mix is the Societe Generale UK Defensive Growth Plan (UK Four) Issue 21 which offers a potential for growth at maturity equal to 5 times any rise in the FTSE 100 Index from 90% of the Initial Index Level, capped at 54.5%. As with the Meteor plan, little market growth is required to achieve maximum results. If, at the end of the six-year investment term, the FTSE is 0.9% or more, above the level recorded at commencement, investors will receive the maximum gain of 54.5%. The downside market protection mirrors that of the Meteor plan, therefore will only give rise to a loss from market movements if the FTSE is down by more than 40% at the end of the term. The credit risk is diversified between four UK financial institutions: Aviva Plc, Barclays Bank Plc, Lloyds Bank Plc and HSBC Plc, which according to rating agencies, all have a ‘strong’ capacity to meet their financial obligations.

Investors who wish to add an early maturity feature and additionally diversify counterparty exposure within the portfolio can do so by including the likes of the Walker Crips Semi-Annual Step Down Kick Out Plan June 2017. This auto-call plan offers the potential for an early maturity on any of the plans six-monthly observation dates from year two onwards with an attractive return of 3.5% for each six-monthly period (7% annually), provided the FTSE 100 Index closes at, or above a reducing reference level. The Reference Level in year two is 100% of the Initial Index Level and is reduced by 5% on each subsequent anniversary. The capital protection barrier is also set at 60% and measured at the end of the investment term. The counterparty to the investment is Goldman Sachs International who have a credit rating of ‘A+’ from Standard and Poor’s, suggesting that like the other counterparty/financial institutions utilised within this portfolio, they have a strong capacity to meet their financial commitments.

This combination of products has been designed for those who are sceptical of where markets will be in the future. It allows investors to benefit even if the market is slightly down, provide gains with little growth in the index, provide protection from market falls of up to 40% and diversify credit exposure between six different financial institutions.

There are certainly many investments that could outperform such a portfolio in a significant bull market, however this portfolio can outperform in flat or slightly negative markets. We believe the combination of investments within this mini portfolio will enhance and enrich an already diversified portfolio.