Josh Mayne Lowes Financial Management
23rd October 2019
This Monday the October 2016 issue of the Mariana Capital 10:10 reached its first maturity opportunity. With the FTSE 100 Index only 2.04% up from where it was when the plan started, options 1 and 2 matured with gains of 21% and 27.3%. However, option 3, which required a 10% rise in the index will continue for at least another year when, if the FTSE is above the 10% maturity trigger, investors will be rewarded with a 46.2% gain.
In light of this, we’ve been reflecting on what we feel to be a standout product in the UK retail structured product sector and have summarised ten reasons why we believe you should consider the Mariana Capital 10:10 Plan November 2019.
1. The plan, somewhat surprisingly, has a maximum 10-year term.
Drawing on our expertise in the UK structured investments sector we were able to establish that maximizing the term of the autocall plan had very little adverse effect on its potential returns. However, extending the term of the plan does increase the opportunity for ‘snowball coupons’ to be earned by adding to the number of maturity observation dates. The extended term also naturally allows more time to ride out a sustained bear market.
2. The plan requires a ten-year commitment but has eight possible maturity dates meaning you aren’t necessarily tied in for the full ten years. Other than in adverse market conditions the plan will potentially mature early.
The first early maturity date is the plan’s second anniversary, and subsequently on each anniversary thereafter. For the November 2019 issue this means that if it was to mature at the earliest possible date, investors would enjoy gains of 16.40% (Option 1), 21.88% (Option 2) or 26.94% (Option 3) which equate to annualised returns of 7.89%, 10.4%, and 12.67% a year respectively
3. 10:10 plans typically offer potential higher coupons than similar structured investments linked solely to the FTSE 100 Index.
Investors in the plan are potentially rewarded with more favorable returns than shorter term plans, partly due to the presence of the 70% capital protection barrier, as opposed to the more typical 60% barriers utilised on shorter plans.
4. The plan allows for appreciable market movements throughout the term.
The plan’s capital return barrier (70%) is only observed at the end of the investment period. Therefore, a positive gain can still be achieved even if there are significant falls in the FTSE 100 Index performance during the term, providing the market recovers by the end of the investment period. This feature, together with the lengthy ten-year term, can give investors comfort in having a longer ‘recovery’ period following unforeseen adverse market conditions, all the while potentially generating higher potential gains.
The presence of the barrier means that in the unlikely event that maturity conditions are not met before ten years have elapsed, the FTSE 100 Index would need to be down by more than 30% for the investment to give rise to a loss. We hope this barrier will not prove necessary thanks to the ten-year term and as such, the multiple opportunities for the plan to mature prior to the final observation date.
5. The counterparty for the November 2019 10:10 plan is Goldman Sachs International.
Goldman Sachs International is part of the wider Goldman Sachs Group Inc which is a leading global investment banking, securities and investment management firm. As of 23 July 2019, Goldman Sachs International’s credit ratings were as follows:
A+ (Stable) – Standard & Poor’s
A1 (Stable) – Moody’s
A (Stable) – Fitch
Whilst these ratings show that the rating agencies believe that Goldman Sachs has strong capacity to meet its obligations they should not be considered assurances of the creditworthiness and the stability of the institution; counterparty risk should be understood and accepted before investing in the plan.
6. The 10:10 has three investment options, allowing investors to express their market view.
The November 2019 issue offers three investment options, each with different potential returns defined by the FTSE 100 position required to trigger a gain. This optionality allows investors to select the plan that more closely aligns with their own market view.
Option 1 will mature with a gain of 8.2% for every year that the plan has been in force, providing the FTSE 100 Index is at or a above a reducing reference level on any given observation date. The reference level for year two is 102.5% and reduces by 2.5% on each subsequent anniversary, to 82.5% on the tenth.
Option 2 will mature with a gain of 10.94% for every year the plan has been in force, providing the FTSE 100 Index is at or above its’ initial index level on any given observation date.
Option 3 will mature with a gain of 13.47% for every year the plan has been in force, if the FTSE 100 Index is at or above 105% of its’ initial index level on any given observation date.
7. Investment availability
The 10:10 Plan is available as direct investment, Stocks & Shares ISA, ISA transfer, pension investment and can also be invested in by trusts, corporates and charities. Resultantly, investors can enjoy the relevant tax benefits associated with the range of wrappers. The plan is available to invest in on either an advised or non-advised basis, (but is not currently available to overseas investors, or persons that file their taxes in the USA).
8. The Plan is linked with the performance of the FTSE 100 Index.
Both the capital gain and capital return elements of the plan are linked with the performance of the widely quoted FTSE 100 Index, a diversified, global equity index consisting of the largest companies, by reference to their market capitalisation, listed on the London Stock Exchange. Where a listed company declines in value it will be replaced in the index at the quarterly review. Whilst past performance is not a guide to the future, the back-testing of the 10:10 Plan comparing every day the FTSE 100 Index has been in existence is very favorable.
9. Returns
As we know, past performance is not a guide to future performance but its comforting to note that the 10:10 Plans that have matured to date (twenty-five in total), have, collectively produced an average return that exceeded that achieved by the rest of the sector.
The table below compares the performance of the maturing 10:10 Plans against other capital-at-risk product maturities occurring in the same time period.
Structured product maturity results analysis October 2018 - Octber 2019. Source: Lowes Financial Management.
| All Capital-at-Risk Plans | 10:10 Plans | |
|---|---|---|
| Number of maturing products | 224 | 27 |
| Number returning a gain | 219 | 27 |
| Number returning capital only | 2 | 0 |
| Number returning a loss | 3 | 0 |
| Average duration / term (years) | 3.37 | 3 |
| Average Annualised Return (%) | 6.77 | 8.83 |
| Average Annualised Return Upper Quartile (%) | 9.32 | 11.24 |
| Average Annualised Return Lower Quartile (%) | 4.06 | 6.64 |
