UBS reverse convertible index offers deposit-beating returns

UBS has created a reverse convertible index to offer German investors income which beats the return on bank deposits

Changes to the tax system in Germany have led to increased demand for income from investors

UBS IS OFFERING German retail investors a money-market style index that tracks a one-month reverse convertible and aims to pay an annual coupon of the European Central Bank base rate plus 3%.

The UBS Rolling Aktienanleihe Index (Rolling Reverse Convertible) is aimed at investors who are unsure of investing in the equity market and are willing to take some risk in return for regular income and a higher return than they would get from a bank deposit.

“We have seen a massive surge in reverse convertibles through 2009 and into this year because people want simple, low-risk, coupon income,” says Aveesh Acharya, equity index structurer, associate director at UBS in London. “Volatility levels over the past couple of weeks make this product even better, because the investor is selling a put at much higher prices than in quieter times.”

In Germany, risky structures such as shares were tax free until January 2009 when held for more than 12 months, notes Acharya. Coupon income, such as that from reverse convertibles, was taxed at normal rates. The tax rule changes mean that everything is now being taxed at the same rate and investors want income, which this index aims to provide.

The index consists of a bond and a short put, with a month-long duration. The put is written on the Eurostoxx 50. The index works by selecting an appropriate strike level for the put at the beginning of every month. The index has built-in features to reduce the risk of drawdown.