Mariana FTSE 150 Kick Out Plan – June 2020
Working with Natixis and utilising an index created by FTSE Russell Mariana have created what they believe to be an attractive proposition. The FTSE Custom 150 Equal Weighted Discount Return Index (‘FTSE 150 Index’) is designed to measure the performance of the 150 most highly capitalized stocks listed on the London Stock Exchange. It employs a straightforward and transparent approach to evenly distribute weight across all 150 constituents, as opposed to weighting by market capitalization. Index constituents are the members of the FTSE 100 Index and the top 50 largest FTSE 250 constituent companies.
How does the discounted return work?
- Unlike the FTSE 100, which is a price return index, the FTSE 150 Index is a total return Index, meaning that all dividends paid by its constituents will be fully reinvested, and reflected in the value of the index.
- The FTSE 150 Index then uses a discounted dividend feature, whereby an annualised figure of 5% is discounted from the index on a daily basis.
Why use a discounted dividend mechanism?
- The index uses a discounted dividend to improve pricing parameters in structured products (resulting in a better coupon for the investor) whilst trying to maintain an outperformance over the FTSE 100 Index in the long term.
How can it improve the parameters in structured notes?
- Using a discounted dividend tackles some of the issues around the dislocation of long-term dividend pricing.
- When pricing a structured note on price return indices such as the FTSE 100, a bank’s traders use long term dividend futures to hedge themselves against dividend risk. These futures are trading below levels at which dividends have historically realised (due to a structurally high demand from investment banks needing to hedge such risk).
- This has a detrimental effect on the pricing of structured products such as autocalls.
- The FTSE 150 Index avoids this issue, as traders do not have to hedge their dividend risk (there is no risk as the Dividend is fixed at 5%).
Using this underlying Mariana have come up with the below structure;
Why is the discounted Dividend fixed at 5%?
- The level of the discounted dividend is fixed at 5%. Whilst this is higher than the historical dividend yield of the FTSE 100, the figure has been optimised to provide a balance between offering attractive pricing in Structured Notes and maintaining outperformance over the FTSE 100 in the long term.
How does this effect performance?
The below table shows the 10-year performance, volatility and correlation for the FTSE 100 and FTSE 150.
- The below chart shows the performance of the FTSE 100(UKX) and FTSE 150(UKX150EQ)
For further information/details on this plan please click on the following link:
Don’t Forget the Risks
As with all forms of investment there are risks involved. These plans do not guarantee to repay the money invested. The potential returns of the plans and repaying the money invested are linked to the level of the stock market and also depend on the financial stability of the Issuer and Counterparty Bank.
The promotion of the plans does not constitute ‘advice’ to invest. Advice is always specific to an individual investor’s circumstances and needs, following the process of ‘know your customer’, with the aim of ensuring that any product is suitable for an investor.
As always, the recommendation and common sense approach is to consider product solutions as a portfolio, never over-exposing oneself to a point of financial pain and suffering liquid or counterparty exposure.
At the Best Price FS price point (when combined with our smiley and helpful service) the Mariana Plans are certainly worthy of consideration for inclusion within investment portfolios.
Simply get in touch if you wish to receive regulated advice in relation to the ‘suitability of the plans to meet your investment needs’.
Best Price FS Team