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Blue Sky Asset Management has defended its Accelerated Recovery Plan after the structured product breached its capital protection barriers last week.

Blue Sky based the product on a selection of five UK large-cap bank stocks. It offered full capital protection, provided none of those stocks fell below half of their initial share price.

This price was defined as an average of the share price over the first three months of the plan, which began on 20 June.

On 1 October, Blue Sky confirmed HBOS had closed at 122p at the end of the previous day, more than 50 per cent below the original mean of 258p.

According to the terms of the plan, investors will now lose as much as the lowest-performing stock in the portfolio when the plan matures on 20 June 2014. If the lowest stock meets or exceeds the initial average, investors will lose nothing.

Even if investors do lose capital, they stand to participate 1250 per cent in the performance of the stocks up to a maximum gain of 125 per cent, as long as the portfolio average is higher than the initial three-month average on maturity.

Chris Taylor, chief executive, said the plan clearly indicated the product's aims and conditions and that Blue Sky informed all advisers of the breach immediately.

"The fundamentals of the sector present interesting scope for investors who believe fundamentals and share prices have become dislocated," he said. "The Accelerated Recovery Plan was put forward as a special proposition for investors looking for a tactical part of their portfolio. We introduced certain measures into the structure to minimise risk as much as we could.

"We haven't had any queries about what's happened. Any prospective investor has been able to investigate the contingent capital protection immediately to assess the risks of the plan."

Mr Taylor said rights issues by UK banks earlier this year had already been reflected in the product, as would the Lloyds TSB/HBOS merger if it went ahead.

Structured products with capital protection have become popular in the UK over the last year, as investors seek defences against market volatility with the possibility of secure long-term returns.