For funds, sector classification can help investors find what they’re looking for more quickly and allows them to judge investments against their comparable peers. For structured products, it’s a similar story in that the different product types are a starting point for investors to consider and identify what they want.
Of course it depends on investors’ expectations of markets, returns and risk appetite.
Bullish – expectation of rising markets
For any investor who is moderately bullish about market prospects over the medium term, a portfolio of growth structured products can complement traditional fund exposure. The former can significantly outperform other investments thanks to geared market participation offered by many such structured products. For example, if over the next six years the FTSE rises by 5% or more, there are growth products that will produce a 60% gain.
Out of the 1,815 maturities of UK retail structured product distributed through the independent financial adviser space over the last five years to 31 July 2015, growth products were the biggest group, making up over half of the maturities.
Looking at the 250 capital at risk products that matured over the period, the average annualised return was 7.66% over an average term of 4.65 years. The average total return was 42.35%. The wide range of returns is evident in the top 25% of products making an average annualised return of 13.69%, while the bottom made 0.15%.
Neutral – slightly rising markets or moderate falls
Most growth or income-oriented structured products are designed to run for a fixed term of typically five or six years, but auto-call or “kick out” contracts can mature early if pre-set conditions are met.
However, regardless of the product type, investors need to be prepared to hold a structured product for the maximum investment term, as while it is possible to sell out early and sometimes it may be advisable to do so, the defined returns of a product only apply at certain dates and outside of these, returns are not easy to predict accurately.
If investors have a neutral market outlook, auto-calls are an option worth exploring, as they can mature on defined dates with pre-set gains in the event of slight market rises, or in certain cases, moderate falls. For those keen to reinvest their proceeds, they can put this money in rollover substitutes from the same provider, another product offer or opt into the markets through other investments.
Auto-calls have frequently been the best performing structured product type on an average annualised return basis, primarily because of their early maturities in rising market conditions. Looking at maturities over the same
five year period, the 633 capital at risk products made an average annualised return of 9.2% over an average term of 1.74 years. The average total return was 15.01%, lower than the growth products because of the shorter terms.
The top 25% of capital at risk auto-calls made an average annualised return of 13.14%, while the bottom quartile made 5.46%. Therefore, even the bottom 25% of these products made an impressive return for investors, beating the equivalent figure for growth products.
Bearish- falling markets
Arguably, if you’re bearish on where markets are going, perhaps you shouldn’t be investing at all but a structured deposit or capital ‘protected’ product will provide growth if you’re wrong and protect capital if you’re right. Structured deposits are essentially fixed-term deposit accounts, where instead of interest being earned at a set or variable rate, the return is not fixed but depends on the performance of the underlying asset, such as the FTSE 100. They are designed to return investors’ original capital as a minimum at maturity.
As with most UK deposit accounts, structured deposits usually include the potential benefit of protection should the deposit taker become insolvent during the investment term, with recourse to the Financial Services Compensation Scheme (FSCS). UK eligible claimants have the right to claim up to £85,000 per individual per institution in such circumstances. This is dropping to £75,000 from next year.
A capital ‘protected’ product is similar to a structured deposit, but the capital protection is contingent upon the counterparty, the financial institution backing the plan, remaining solvent and if it fails, such investments are not covered by the FSCS.
Looking at the 557 capital ‘protected’ and deposit based FTSE 100 linked growth product maturities over the same five year period, they delivered an average annualised return of 3.95% over an average term of 4.77 years. This equated to an average total return of 20.11%.
Another group to consider are ‘defensive’ structured products, which offer the opportunity for a gain even if the market falls by a predefined amount. For example, an auto-call product offering a gain if the index level on a set anniversary is above 90%, rather than 100%, of its starting level.
While the return profile of these products may not be as attractive as traditional products, they can be a useful portfolio addition for an investor who is concerned about high market levels.
Income investors
The other main group of structured products is income plans. Whilst often a suitable option for those with this priority, just because this is income investing doesn’t mean it is without its risks.
This can be overlooked – as in equity investing, attractive levels of income are associated with more defensive companies – but looking at the difference in quartile performance below highlights the importance of product selection.
Looking again at capital at risk, the 131 products made an average annualised return of 4.56% over an average term of 5 years. The first 25% made an equivalent figure of 7.31%, while the bottom made an annualised loss of 1.94%.
Whatever the product type, each product needs to be assessed on its own individual merits. The defined returns of structured products means that you do know exactly how a product will perform in different market scenarios. This is a benefit to these investments that should be capitalised on and shows how they can help spread risk within your portfolio.
Source - everyinvestor
No comments:
Post a Comment