A 200% return from FTSE 100 – too good to be true?

Cater Allen Private Bank has launched a structured product promising to return up to 200% of any growth in the FTSE 100 during a six-year period, capped at 50% of the initial investment. The bank says the Capital Guaranteed Enhanced Growth Plan 1 is aimed at investors who believe the index will rise only marginally during the term, offering a high return on minimal growth. Fernando Gasca, head of structured products at Cater Allen (which is owned by Santander ), explains: "While uncertainty is still prevalent in today's market, the long-term outlook for FTSE growth is more promising. This product will allow you to benefit from any future economic improvement and without taking the risk of any stock market correction." But financial advisers are not so sure. Ben Yearsley of Hargreaves Lansdown says: "I can't think why anyone would want to invest in this product. I'm finding it very hard to get excited about it." Martin Bamford of Informed Choice adds: "This is fairly typical fare from a bank to try and get some cash in during a difficult period. But investors will find they are penalised if they make a withdrawal, while the averaging process Cater Allen is using could make a significant difference to the return investors will get." The product will take as its opening price the FTSE 100 index value at the close of play on 3 September 2010, but the closing index value will be calculated from an average of the index taken at 12 stages over the final year, effectively once a month throughout the last 12 months. The bank says this will, "ensure the plan is cushioned from any sudden fluctuations in the FTSE 100". But Bamford warns that by taking the average, investors could lose out on any surging growth in the final year. "This can really affect the return investors receive if the index rises significantly during that final year," Bamford argues. "They'll get an average, when investors in other products will see the full benefits of that growth. If investors want equity-style returns with less risk, they are better off building a balanced portfolio rather than investing in this kind of product." Yearsley says the cap on returns of 50% of the original investment means investors can easily generate the same or better returns elsewhere: "The FTSE100 has a dividend yield of 3.5%, so if you invest in a simple tracker with dividends reinvested, you only need the index to rise by 25% and you're on the same return as the Cater Allen product already." He recommends an absolute return fund that offers a high return of 7%, 8% or 9% per annum with limited downside – "something like the Gartmore European Absolute Return Fund or the BlackRock European Absolute Alpha Fund ". The product is guaranteed by Santander, something Bamford says might not be so safe given the current state of the eurozone. Moreover, he reminds investors that six years is a long time in investment and a lot can happen. "We expect to see this kind of advertising at a time like this, preying on investors' nerves a little. I'd think very carefully before investing." The Capital Guaranteed Enhanced Growth Plan 1 has a minimum investment of £10,000. The offer closes on 13 August 2010 and the product matures on 5 September, 2016.