Back

2,000 and counting

CompareStructuredProducts.com - 24/07/2024

Monday marked a significant milestone in the UK retail structured product sector, twenty- years since the very first autocallable structured product matured, the UK retail sector has now seen the 2,000th FTSE only capital at risk autocall mature. The FTSE linked capital at risk autocall is the mainstay of the UK sector, accounting for approximately 60% of autocall issuance and maturities to date.

Ten of these matured on 22nd July 2024, bringing us up to 161 maturities for the sub-sector this year alone, and 2,005 in total.

Between 2011-2013 eight plans matured returning capital only, these plans commenced prior to the 2008 financial crisis and the FTSE 100 had not recovered to their initial strike levels. Had these plans had maximum terms of seven years only one would have failed to produce a gain. In November 2023 five more finished their six-year maximum terms returning invested capital only. We will have to wait a few more months to see whether an extra, theoretical year on the term would have ensured positive returns – at current FTSE levels (22 July 2024) positive maturity would have been be realised, reinforcing our view that longer maximum durations improve the risk-reward profile of these investments.

Collectively the maturing 2005 plans have achieved average annualised returns of 7.62% over an average duration of 2.2 years with upper and lower quartiles of 10.11% and 5.62% respectively. These bank-based contracts delivered returns exactly in line with their pre-defined terms for the prevailing market conditions. Despite the consistent success delivered over more than two decades these investments are still relatively unknown amongst retail investors and even many advisers.

An example of these investments is an HSBC Bank issued FTSE linked autocall. This investment began in July 2024 and will mature two years later with a return of capital and a 16% gain, even if the FTSE 100 Index has fallen, provided it is not more than 5% below the Initial Level recorded at commencement. If the index is more than 5% lower on that date, the investment runs for another six months when 4% is added to the potential return with maturity triggered provided the index is not more than 5% below the Initial Level, returning capital plus a 20% gain. If the index is still more than 5% below the Initial Level, the process continues adding 4% to the potential gain for each six-month period that elapses.

This strategy has a very high probability of triggering a positive maturity at some point before the end of the seven-year maximum investment term. Historically, you would have had to have been extremely unlucky to have commenced such a strategy and not had it mature positively.

Even so, there is no guarantee and if the investment runs for the maximum seven years because the FTSE was below the 95% maturity trigger on every six-monthly observation date, then at that final anniversary, if the index is higher, capital plus a 56% gain would be returned. If the index is still more than 5% below where it was at commencement, the investment will return the invested capital only, unless the FTSE 100 is more than 35% lower than where it began seven years earlier. In such a case, a loss in line with the fall in the FTSE over the term will occur.

It’s important to recognise that these contracts are issued by banks and other significant financial institutions but if the issuer becomes insolvent during the term, it will not be able to meet its contractual obligations. Investors will be senior unsecured creditors but likely facing significant losses, taking several years to recover pennies on the pound.

In the 21 years since the first capital at risk, FTSE linked autocall was issued, just thirteen have matured returning capital only, and none have returned a loss. This demonstrates the effectiveness of the baked-in risk mitigation strategy that these investments offer.

The example presented above is a defensive contract where the maturity trigger is below the starting level however the most prevalent shape of FTSE autocall is the at-the-money (where the index needs to be at, or above the starting level to trigger maturity), accounting for over 51% of all FTSE only autocalls, followed by the step-down (where the maturity trigger level reduces over the term) (35.9%), defensive (9.5%) and hurdle contracts (trigger level is above the starting level throughout the term) (3.5%).

FTSE autocalls continue to reward investors with excellent results whilst presenting advisers natural and regular opportunities to present clients with positive performance news.

With a regular flow of FTSE autocalls being issued via 7 providers utilising 10 different significant counterparties the sector continues to go from strength to strength.

* FTSE incorporates plans linked solely to the FTSE 100 or its very close, 99%+ correlated ‘cousin’ the FTSE CSDI, which tracks the same 100 stocks with the same weighting but accounts for dividends differently.

Structured investments put capital at risk.

Past performance is not indicative of future results.