Mariana 10:10 Plan September 2021 (Option 2)
This maximum ten-year investment offers the potential for a simple gain of 8.75% for each year held, depending on the performance of the FTSE Custom 100 Synthetic 3.5% Fixed Dividend Index (FTSE CSDI). The FTSE CSDI was specifically designed for structured products and is expected to closely replicate the performance of the FTSE 100 Index. Please see below for further detail.
The terms of the Plan provide protection to the invested capital against all but a severely underperforming stockmarket over the investment term, or the counterparty’s failure. Whilst the Plan is designed as a maximum ten-year investment, it will mature early on any of its anniversaries from year two onwards, provided the FTSE CSDI closes at a level at least equal to that recorded at commencement. Briefly, the Plan is structured to provide the following returns:
The Plan is designed to return the invested capital in full, in addition to an 8.75% gain for each year held if, on any of its anniversary dates from year two onwards, the FTSE CSDI closes at, or above, the closing value recorded on 17th September 2021 (the Initial Index Level).
Therefore, if on 18th September 2023 the index closes at a level at least equal to the Initial Index Level, the Plan will mature returning the invested capital, plus a gain of 17.5%. If the Plan does not mature on this date, it will then continue onto year three. Once again, if the index closes at a level at least equal to the Initial Index Level on the third anniversary date, the Plan will mature and return the original capital investment in full, in addition to a 26.25% gain. Otherwise, the Plan will continue onto year four, etc., through to year ten.
If the Plan reaches its final maturity date because on each of the previous eight anniversary dates the index closed below the Initial Index Level, then the maturity value will be dependent upon the closing level of the FTSE CSDI on 17th September 2031 (the Final Index Level).
If the Final Index Level is at, or above, its initial level, then the invested capital should be returned in full, in addition to an 87.5% gain (i.e. 8.75% gain multiplied by ten years).
If the Final Index Level is below its Initial Index Level, no gain will be returned; however, investors' capital should still be returned in full, unless the Final Index Level is more than 30% below the Initial Index Level. If such a fall does occur, investors will suffer a reduction to their invested capital of 1% for every 1% the Final Index Level is below the Initial Index Level. For example, if the index finishes 35% lower, only 65% of the original capital will be returned.
The returns outlined above, including the return of capital are dependent upon Morgan Stanley, the counterparty to the investment, meeting their contractual obligations on time, as investors will in effect be lending their capital to them.
Morgan Stanley has a Standard & Poor’s rating of ‘BBB+’ indicating that they believe it has adequate capacity to meet its financial commitments. Regardless of the perceived strength of a counterparty, it must be appreciated that if Morgan Stanley is unable to meet its liabilities or, is declared bankrupt, investors could lose some or all of their capital regardless of the performance of the index.
Under the terms of this Plan, in order for there to be a reduction to the invested capital, it would require Morgan Stanley to default or the Plan’s early maturity feature trigger to be missed on each of the eight observed anniversary dates and the FTSE CSDI to close on 17th September 2031 at a level more than 30% below its Initial Index Level. In the latter event, the loss to the invested capital would be at the same level as the fall in the index.
The Plan literature states that under current legislation any gain produced by this investment when held outside of a tax shelter will be subject to Capital Gains Tax rules, which may prove favourable as every individual has an annual capital gains exemption (£12,300 for the 2021/2022 tax year). Any gains that fall outside of the annual exemption in the year of maturity will be subject to tax at the prevailing rate which is currently 10% for basic rate taxpayers and 20% for higher rate taxpayers.
This investment is designed in such a way that it may have to be held for the full ten years and if it is encashed during the term (other than as the result of the early maturity feature), investors’ capital may not be returned in full, even if the index has risen.
Like most investments, this Plan is only suitable for those who are prepared to expose their capital to a degree of risk and accept the consequences of these risks resulting in the worst outcome. It is important that would-be investors read the Plan literature which gives full details of the contract including details of the risks, to which they should pay particular attention.
About the FTSE Custom 100 Synthetic 3.5% Fixed Dividend Index (FTSE CSDI)
The CSDI Index was created specifically for structured products by FTSE Russell, the same organisation that calculates and publishes the FTSE 100 Index. The CSDI tracks the same 100 shares but unlike the FTSE 100, the CSDI includes the benefit of the dividends paid by the 100 companies (which have historically averaged around 3.5% per annum) and then deducts the equivalent to a fixed 3.5% dividend per annum, on a daily basis. The result is that the index will perform almost identically to the FTSE 100 if dividends are at 3.5% pa, moderately underperform if they are less, and moderately overperform if they are more. In return for the structured product investor accepting the risk of variability of dividends, the counterparty bank does not have to. At times like now, counterparties are erring on the side of caution when estimating future dividend yields, with the cost of their caution reflected in the potential return they are prepared to offer on FTSE 100 linked structured products, compared to those linked to the CSDI.
The net result is that the returns that can currently be offered on structured products are enhanced by using the CSDI which is around 98% correlated with the FTSE 100 index. We consulted at length over the introduction of the CSDI and have no hesitation in endorsing its use as an alternative underlying index for autocall structured products.
For more information on the FTSE CSDI, please refer to the product literature. A link to the current price of the Index can be accessed via www.Lowes.co.uk/CSDI . You can monitor your structured products linked to this or any other index through our SP-Perspective.com service. If you have not yet registered account, please contact us.
Lowes has provided input into the concept, development, promotion and distribution of this Plan. The provider’s charges/fees are built into the terms of the investment - Lowes has a commercial interest in the Plan as a result of its involvement in its development and promotion. All Plan returns are stated after allowing for the provider’s charges/fees. Where Lowes is involved in advice on or the intermediation of this investment to retail clients, it will not be paid any fee from Mariana for its input.
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