‘An investment backed by a significant counterparty (or counterparties) where the returns are defined by reference to a defined underlying measurement (such as the FTSE 100 index) and delivered at a defined date (or dates).’
We believe that structured products offer many attractive features which can be used to satisfy a variety of investor needs. However, we do not believe they should be seen as a replacement but as a complement to traditional investments.
These are typically sold by banks and building societies, are designed to return at least the original capital in full at maturity and potentially benefit from the Financial Services Compensation Scheme (FSCS) protection of up to £85,000 in the event that the issuer fails or defaults.
Like Structured Deposits, these plans are designed to return the original capital regardless of the how badly the stockmarket or underlying measure performs but unlike deposits, they will not benefit from FSCS protection if the counterparty defaults.
These investments will give rise to a loss at maturity if the underlying index performs poorly over the investment term but they typically incorporate a ‘barrier’ which protects the capital other than in the event that the stockmarket falls by, say, 50%. Conversely, by putting the capital at risk these products usually have the potential to produce much higher returns than capital protected or deposit based plans.
There are many variations on these general investment types and sometimes a product can incorporate features from more than one type, so please ensure that you read the description and product literature carefully. Please note that full return of capital is determined by the continued solvency of the Counterparty and the capital protection conditions.
An investment designed to provide growth, which can be a fixed return dependent on underlying asset performance over the investment term, or geared participation in the same performance.
An investment which has the potential to come to an end and pay out a set amount on specific anniversary dates, depending on the terms of the product. The most common example of this would be if the index is at or above its initial level one year after the start date, the plan would mature, returning investors’ original capital in full and the set payment for one year.
If these criteria are not met, the plan continues until the next anniversary date and the same criteria are checked. If the index is at or above its initial level, the plan would mature, returning investors’ original capital in full and the set payment for two years. This continues until either the plan matures early or it reaches the end of the investment term.
There can be several variations on this theme. For example, products in which the underlying index level required for the product to mature early reduces each year, products that can only mature early from their second anniversary onwards or products that are linked to more than one underlying index and will only mature early if both of these indices are at a required level.
An investment designed to provide income, payable monthly, quarterly or annually. Some plans pay income gross, so please ensure you are aware of the tax implications of any plan you invest in. Income can be unconditional (payable irrespective of how the underlying assets perform), or conditional (income is only payable if the underlying asset meets certain criteria, such as staying above or below a certain level).
While there are various barriers can be used which offer different degrees of protection to capital, there are two broad types that are most common:
These plans aim to return the original capital investment at maturity, providing that the final level of the underlying product index is not below the initial level by more than the specified percentage (the barrier level). This type of barrier is also termed a ‘European’ barrier.
These plans aim to return the original capital invested at maturity, unless the underlying index falls below the initial level by more than the specified percentage (the barrier level) at any point during the investment term and has failed to recover to the initial level at maturity. This type of barrier can be referred to as a ‘Full Term Intra-Day’ barrier.
Many plans now feature barriers which are observed on the closing daily level of the underlying index for the full product term, rather than any point within the term. This may seem a negligible difference but in volatile market conditions daily movements in many asset classes can be extreme. This type of barrier can be referred to as a ‘Full Term Close of Business’ barrier. Collectively, these types of barriers are also referred to as ‘American’ barriers.
‘Geared participation’ means that an investor receives a non-unitary proportion of any rise in the underlying index, for example 4 times any rise in the underlying index. Participation in an index is often capped at a maximum return of original capital, offering, for example, 5 times any rise in the FTSE 100 Index over 5 years, capped at 50% return on the original investment capital.
Please note that most structured products do not include any allowance for any return or reinvestment of dividend income that would arise if the investment was made directly in the underlying shares in an equity or other yield bearing Index.
While Structured Deposits are deposit-based investments and potentially benefit from the Financial Services Compensation Scheme (FSCS), investments into Capital ‘Protected’ and Capital at Risk products are, in effect, loans to a financial institution known as a ‘Counterparty’. The return of capital will be dependant upon the continued solvency of the Counterparty throughout the term of the investment; therefore, the capital will be at risk from the date of investment. Before proceeding, investors must be aware that, should the plan's underlying counterparty file for bankruptcy during the term of the plan, or be unable to repay its liabilities, some or all of the capital invested may be lost. As with all investments, it is imperative that investors read the plan brochure and terms and conditions thoroughly and understand the risks involved before proceeding.
Capital at Risk products put the invested capital at risk of loss if the underlying index falls. However, most of these products incorporate a ‘barrier’, a specified level in the underlying index (usually 50% of the starting level) which must be broken by the underlying index if capital is to be lost (subject to the continued solvency of the Counterparty).
If the barrier is breached and the Final Index Level is lower than the Initial Index Level, capital will be reduced by this ratio for every 1% that the underlying measurement is below the Initial Index Level. For example, if a product has a 50% End of Term barrier with a 1:1 downside and the underlying measurement closes 60% below its Initial Index Level, capital will be reduced by 60%. Alternatively, if a product has a 0.5:1 downside in the same scenario, the capital would be reduced by 30%.
IFA distributed structured products are regularly maturing. CompareStructuredProducts.com tracks the performance of each of these products. To view the returns generated by the products that have matured in the last two months visit the Performance page