Scottish Widows Investment Partnerships is structuring a fund in which investors short a basket of 30 five-year knock-in puts linked to shares of major U.K. listed companies, such as Vodafone, Imperial Chemical Industries and Marconi. Tony Whalley, investment director in Edinburgh, said its parent company--Lloyds TSB--will purchase the over-the-counter puts. The fund, which closed last week, is aimed at retail investors.
The fund, dubbed the Extra Income and Growth fund, will generate a souped up return of approximately 9.75% a year through selling options, Whalley explained. If the options are not triggered, investors get their initial capital back at maturity. The puts knock-in if the corresponding share price falls to thirds of the initial value. However, the investor doesn't automatically lose if the puts are knocked in since Lloyds TSB will only exercise the options if the share price is below the initial value at maturity. The more puts that are exercised the more of the investors' capital is eroded. The puts are cash settled.
Whalley predicts the U.K. stock market will rise as many stocks, especially in the telecom, media and technology sector, have tumbled and as a result are now more realistically priced. He predicts the FTSE 100 will finish the year at 6,200 it was trading at 5,427.8 Tuesday.
The fund has over GBP300 million (USD422 million) under management. Scottish Widows Investment Partnership has total assets of GBP81.5 billion.
