In all other respects, Deposit Plans are the same as a fixed term deposit; they are capital protected deposit accounts, feature a defined term and qualify for FSCS protection. Deposit Plans are generally considered as one notch above traditional cash products on the risk/return scale. They offer a higher potential return (or “interest rate”) than fixed term deposits, but they also feature the risk of paying no return at all if the underlying asset doesn’t perform in a certain way.
Investment Plans are equity-linked corporate bonds. They feature the same pre-defined payoff characteristics as Deposit Plans, however they offer higher potential returns by introducing the potential for capital loss if the underlying asset falls by a certain amount over the product’s term. Investment Plans are generally considered as alternatives to traditional equity investments, such as funds. They sacrifice the dividends and uncapped growth potential of funds for pre-defined returns and partial capital protection (capital loss occurs if the underlying asset has fallen by a certain amount – usually 40%). Unlike funds, Investment Plans also expose clients to the counterparty risk of the issuer.
Looking Under The Bonnet
One of the common misconceptions surrounding structured products is that by investing in them, clients are buying derivatives.
When a client invests in a Deposit Plan, the client is depositing their money into an equity-linked deposit account with a bank. The bank is legally obligated to pay any returns due to the client from their equity-linked deposit account, in the same way that the bank is legally obligated to pay interest to its other deposit account holders.
When a client invests in an Investment Plan, the client is purchasing an equity-linked corporate bond issued by a bank. The bank is legally obligated to pay any returns due to the holders of the equity-linked corporate bond (i.e. the client) in the same way that the bank is legally obligated to pay coupons to the holders of its other corporate bonds.
In other words, investors in structured products do not buy derivatives – their money is used to enter into a legally binding contract with a bank; either by depositing money into an equity-linked deposit account, or by purchasing an equity-linked corporate bond.
How the bank generates the returns it owes on its structured products is at the discretion of the bank, however it will usually do this by purchasing derivatives on its own balance sheet.
How Have Structured Products Performed In The Past?
Structured products have delivered compelling performance over the last 10 years, as have most other equity-linked investments given the unprecedented bull market that we have experienced. Looking at the Investec Structured Products range, 651 of our Investment Plans have matured since 2008, paying our clients an average return of 9.12% per annum. None of our Investment Plans have ever resulted in a capital loss. The more interesting statistic is perhaps the performance of our Deposit Plans. Since 2008, 456 of our Deposit Plans have matured, paying our clients an average return of 5.43% per annum. These are compelling returns from a cash deposit and they underscore the value that our Deposit Plans can offer to clients who aren’t satisfied with the interest rates available from their bank.
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