Use Bear and Bull Accelerators to Gear Up Your Investment Returns - dummies

Use Bear and Bull Accelerators to Gear Up Your Investment Returns

By David Stevenson

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).