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Invest in China with downside protection

If you have been thinking about investing in China, but have been concerned by the volatility, then you might be interested in an investment which provides exposure to the region – but which also provides significant protection against possible stock market falls.

This is the main premise of the Capital Accumulator Auto-Call Plan – Greater China Series, from structured product specialist Incapital Europe.

How the plan works

The plan is linked to two Greater China stock markets – the Hang Seng China Enterprises (HSCE) Index, and the MSCI Taiwan Index – and is initially set to run for a period of 5 years.

At the end of the first year, however, the level of each index is compared with the levels recorded at the start of the plan. If both indices are showing an increase, no matter how small, then the plan will mature early and pay out a fixed percentage return.

If the plan does not mature on the first anniversary the levels of the indices are then compared at six monthly intervals, and as soon as both indices are showing an increase the plan will mature.

The most recent tranche of the plan offered a fixed return of 12% if it matured on the first anniversary, increasing by 6% for each further period of 6 months that it continued to run.

With both indices having struggled so far this year, it could well be an excellent time to invest in such a plan.

Downside protection

But what if the plan reaches the fifth anniversary without having paid out?

In that case, you will get back your original investment as long as neither index has, at any time during the five-year period, fallen by more than 50% of their starting levels. If one or both of the indices has fallen by more than 50% and is still below the starting level at maturity, your original investment would be reduced in line with the worst performing index, on a one-for-one basis.

Another investment risk is if the indices rise strongly over the period until early maturity. The maximum return is fixed, so if the rise in markets is higher than the fixed return you will not benefit fully from that rise – and will be faced with reinvesting at a time when markets are much higher than they were.

Counterparty risk

As well as the investment risks described above, the other main risk involved with this plan is what is known as counterparty risk.

To achieve the potential returns on offer, Incapital Europe will use the funds raised by each tranche of the plan to buy certain securities from an investment bank. If that investment bank should fail to meet its obligations – perhaps as a result of insolvency or bankruptcy – then the chances are you would lose all of your investment.

For this reason, Incapital has chosen Barclays Bank to be the counterparty to this plan. Barclays Bank is well known to most potential investors, and is rated AA- by Standard & Poor's – a strong credit rating.

Early withdrawal

While it is possible to withdraw your capital before the plan matures you are likely to get back less than your original investment, so you should not invest capital you are not prepared to commit for a maximum of five years – of course, it may only be tied up for 12 months, but that depends on the performance of the two indices.

Types of investment available

It is possible to invest in this plan in a number of ways. For tax-free returns, it is available as a 2011/12 stocks and shares ISA (maximum investment £10,680), and can also receive transfers from prior years' ISAs.

In addition, it is possible to invest in the plan directly (minimum £10,000). In this case, it is expected that under current tax rules, any investment returns would be potentially liable to capital gains tax (CGT) rather than income tax – which means that you can make use of the annual CGT allowance, an underutilised exemption.

To request a full information pack, please contact us on 0844 4774860 or email

IMPORTANT NOTE: Past performance is not a guide to the future. The value of the investments described can fall as well as rise, so you may not get back the full amount invested, especially in the early years. Tax concessions are not guaranteed and may change at any time; their value will depend on your individual circumstances.

Pulse Independent I.F.A. is a trading name of R.J. Hurst & Partners Ltd., which is authorised and regulated by the Financial Services Authority.

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