Thomas Hughes from Structured Products Review reports:
The UK retail structured product market strengthened during 2013 – with more IFAs recognising the true value that the sector has to offer within diversified portfolios. And helped, perhaps, by events such as IFA Magazine’s own conferences, at which the issues were explored. (Aw shucks – Ed)
Kick Outs Predominate
Autocall (kick out) products dominated the new launches in 2013 (over 65% of all products). Now, in 2012 that popularity could be attributed to the flat markets, in which even small rises in the underlying measurement often gave clients returns in high single and even double digit figures. But 2013 had started with a surge in markets – despite which, autocalls remained popular.
This popularity is likely to have been due, at least in part, to the recent incidence of autocalls maturing in years one or two – resulting in satisfied investors. In addition, advisers and investors taking a market view on how far indices can rise may have concluded that potential returns of 8% or 9% from autocalls in the next year based on the FTSE 100, no matter how much the index rises, are attractive – particularly since the index would have to rise to around 7200 for trackers to achieve similar results. (It closed in 2013 at 6749 – Ed.)
And of course, what makes them even more attractive is the fact that these products accrue coupons for up to six years even if the markets languish, while also protecting investors’ capital from all but the most extreme circumstances.
Pricing was an issue in 2013 – with more of the investment being required to purchase zero coupon bonds and achieve the capital return due to low interest rates, thereby reducing the capital available to produce the potential upside. The value of the options available have also been impacted by low volatility, which further affects the headline rates on offer.
It’s unfortunate that this trend occurred at the same time as the implementation of RDR – which should have increased the upside available, because of course adviser charges were no longer being factored into the products themselves.
Risk Is Back In Favour
The pricing environment has also been seeing a shift away from structured deposits, with only 15% or so of the products launched in 2013 being deposit-based. There was a similar paucity of capital ‘protected’ products, as they accounted for less than 2% of all structured product launches. The remaining 83% were capital at risk products. While alternative options within the structured product market have been limited, the continued level of investment suggests an increasing comfort with the level of market risk that they represent.
Focus on the Footsie
The FTSE 100 has remained the most popular underlying measurement by quite some margin, with just under 95% of products using either the FTSE 100 on its own, as part of a multi-index strategy, or a basket of stocks from the FTSE 100 as their underlying measurement.
Contrary to what some might expect, structured products from firms that underperformed shockingly in 2009 have produced some excellent returns this year – often based on relatively minimal rises in the underlying measurement. To take just one example, the Keydata Dynamic Growth Plan 18 matured in August 2013 returning 72% – compared to a 6.3% rise in the FTSE 100 over 6 years.
Of course it hasn’t all been good news. A number of investments launched in 2007, at what turned out to be the top of the market cycle – and linked to other indices such as the Eurostoxx 50 or Nikkei 225 – found themselves hit harder than most by the credit crisis crash. And since the indices had failed to recover by the time the products matured, they gave rise to losses. On the whole, though, these losers represented only a small aspect of the sector. All in all, 2013 was another good year for the sector
My view is that the UK structured product market could be on the cusp of major change in perception with the products being viewed as essential investments and gaining a warranted place in more investors’ portfolios.