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2019: The good, the bad and the ugly - 18/12/2019

Blair Carmichael, Lowes Financial Management

As 2019 reaches its maturity, and we begin preparing Lowes Structured Products Annual Performance Review, we have been reflecting on what has been another, overall favourable year for investors in UK retail structured products. However, whilst the majority of plans this year have performed well, there have been some standout performers, be it for better or worse…

We’ll start with the ‘good’. As of the 10th of December, there were thirteen structured products which achieved an annualised return for investors of 10%, or greater. The strongest of which was the Meteor FTSE/STOXX Kick Start Plan October 2018, which offered a front-loaded return in the first year of 15% with 10% per additional year thereafter. Maturity would be triggered by both the FTSE 100 and Eurostoxx 50 Indices closing above their initial index levels on a plan anniversary and this was the case on the first anniversary in October when the plan matured returning the 15% gain.

Whilst the majority of the plans producing the highest returns were linked to multiple underlyings, incorporating a ‘worst-of’ element, some of the strongest performers were solely linked to the performance of the FTSE 100 Index. For example, the best performing FTSE 100 plan was option 3 of the April 2016 issue of the Mariana Capital 10:10 Plan, which offered a 12.6% gain for each year held, payable on any anniversary from year three onwards, provided that the FTSE closed 10% or more above the initial index level. This plan matured on its first opportunity, giving an annualised return of 11.28% over the three-year holding period.

The bad news, however, is that August saw the first loss making maturity in over two years; the previous being in May 2017. This represented the end of a run of 907 retail maturities without loss and the August loss making maturity was followed by three more during the rest of the year. All of these losses were due to a function of the inherent greater risk taken by the plans, being linked to the performance of a basket of shares, rather than a market index. The worst performer of the year was a plan from Meteor; the FTSE 5 Enhanced Quarterly Defensive October 2013. This plan offered a potential return of 4% for every three-month period it was held, with the potential for early maturity from the first-year onwards if the five shares were above their initial index levels. Unfortunately, being a “worst-of” share-linked plan, investors were exposed to the full fall in the price of the worst performing share - Standard Chartered plc, resulting in a loss of 56.3% – an equivalent annualised return of -12.88%.

And now the ugly… It’s not too often that retail investors hope for markets to fall, but shortly after investing, this will have been the case for many investors in either of Meteor’s Dual Index Income Deposit plans from January or March of 2013. Plans such as these are often referred to as ‘range-bound’ plans, as annual income payments would have been made provided that the FTSE 100 and the S&P500 indices were within certain ranges – e.g. FTSE 4,900 to 7,200 and S&P 1,200 to 1,680). Unfortunately, because both underlying indices (particularly the S&P500) performed so well shortly after the plan commenced, there were no instances in which both indices were simultaneously within the required range to generate an income on any observation date. This therefore meant that investors in these structured deposits received no income, and effectively had their money locked away in zero-interest bank accounts for six years.

There were more than 300 retail structured product maturities throughout 2019 and whilst the aforementioned bad, ugly and those like them dragged down the performance of the sector as a whole, the average annualised returns of all capital at risk plans was still over 6.6% whilst deposits, on average, returned more than 3% per annum.

Our detailed review of the year’s maturities will be published next month and despite the aforementioned detractors provides further compelling evidence in favour of the structured product sector.

Structured investments put capital at risk.

Past performance is not a guide to the future
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