Retrospective analysis: Credit Suisse's S&P 500 accelerated growth product

A maximum return of 20% was on offer from an accelerated growth product that Credit Suisse issued in May 2009. The maximum return of 20% over the 18-month term was easily achieved due to the five times gearing.

Credit Suisse produced an 18-month accelerated growth product that was first reviewed in the May 2009 issue of Structured Products. The product is linked to the S&P 500 index and offers returns equal to five times the rise in the index up to a cap of 20%. Principal is at risk if the index finishes below the buffer.

On the product’s strike date, the closing level of the S&P 500 index was 797.87, while the index closing level on August 30 (one month before the final market reading date) was 1,048.92, equivalent to an increase of more than 31% over the product term.

The maximum return is 20% of initial investment and, due to the gearing, the index only needs to increase by 4% over the term for investors to get this return. From the strike date to the end of August, the index rise was well above the cap level. If the index were to stay at or above its current level, investor would receive the maximum return, of 120% of their initial investment. As the increase in the index since the strike date exceeds the product cap, and assuming the index remains at its current level, investors would gain a higher return from a product with a lower gearing and a higher maximum return. However, provided the product pays out the maximum return, investors will receive a decent return which is equivalent to 12.92% per annum.

When the product was first reviewed, it was noted that a gearing of five times is one of the highest used with this product type in the US. Such a high level of gearing is far less common in today’s market than it was in March 2009, when this product was issued.

However this month Bank of America issued a product offering nine times the growth in the S&P 500 up to a cap of 220.59% of the initial investment. The product offers no downside protection whatsoever and investors will lose capital at a rate of 1:1 if the index is below its initial level at maturity. The unusual characteristic of this product, along with its exceptionally high gearing, is its 10-year maturity. The product sold 509,000 units at $10 per unit. This is in line with the average sales figure for an accelerated growth product in the US, which for August was $5.05 million. Generally, a highly geared product such as both the Credit Suisse product and the Bank of America product would appeal to investors looking to participate in the market recovery.

The cap level of an accelerated growth product differs according to the level of the gearing. The higher the gearing of a product, the lower the cap, with the most extreme case being no cap and a gearing which is potentially less than 1:1. In cases such as this, where the underlying index rises considerably over the product term, products with a lower gearing but higher cap generally outperform those with a high gearing and a low cap.

The chart shows the performance of the S&P 500 over the product term, the level of the index at the start of the investment, and the amount of index growth needed to reach the cap level. The S&P 500 has not closed below 797.87 since the product’s strike date.

The product has yet to mature, but as long as the S&P 500 does not fall by more than 21% it will produce the maximum return of 120% of notional investment. If the index does not fall by more than 24% over the next month, investors will receive a positive return – only if the index falls by 39% will an investor suffer any loss to capital.

A PDF of this Retrospective analysis is available here