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Use Bear and Bull Accelerators to Gear Up Your Investment Returns

Some structured investment products in the UK are based on the concept of leverage or geared returns; that is, you receive a multiple of the returns from an underlying index. These accelerators can work on the upside (advancing markets) and on the downside.

To help understand the process, imagine the S&P 500 is at 1,200 when an accelerator is issued. The structure offers to pay five times the return of the index (the S&P 500) over the next five years, up to a maximum return of 100 per cent in total.

If you put in £100 per share, you could get back a maximum of £200 as long as the S&P 500 increases by 20 per cent over the five years, with a gearing of 500 per cent.

Of course, some form of barrier is probably in operation, which means that your initial investment of £100 is at risk if the S&P 500 falls by more than 50 per cent; that is, if it falls by 51 per cent, you don’t get leveraged upside returns and also lose £51 per share or unit.

These accelerators contain two new features that are worth considering:

  • A geared upside return: That is, you get back 5 times the change in the underlying index. This gearing varies enormously between products, with a precious few growth structured products boasting no cap (see the next bullet point) at all but much lower gearing.

  • A cap: This maximum payout stops the geared participation moving beyond a defined return; that is, £200 or a 100 per cent gain. The cap also varies enormously between issuers, with some structured products boasting caps set at very low levels (as little as a 20 per cent gain).

This accelerator structure has evolved into many variants with perhaps the most common being a simple growth plan. This structure has no cap, but a much lower gearing rate. An S&P 500 index growth plan may, for instance, involve a geared participation rate of 120 per cent of the annual price return of the index.

This arrangement means that if over the five years of a plan the S&P 500 goes up by 50 per cent, you receive back a total return of 60 per cent (50 per cent x 1.2).

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