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2020 Q2 Maturity Review

Blair Carmichael, Lowes Financial Management - 16/07/2020

Q2 signaled more optimistic market sentiment following a period where a certain R.E.M. track about the end of the world might have felt appropriate. Whilst most European indices remained at depressed levels due to all things Covid, in America, whilst the virus continues to wreak havoc, the markets have staged a significant recovery, with the S&P 500 returning to the index levels which we saw in Q4 of 2019 and the Nasdaq fully recovering and establishing new highs.

The FTSE 100 low point in the quarter occurred at the beginning of the period when on April 2nd the Index saw an intraday low of 5,395.07. Two months later, on June 5th we saw the Index hit its quarterly high of 6,489.99; a rise of more than 20%, measured from the trough to the peak.

In the first quarter of 2020 the UK retail structured product sector enjoyed 108 maturities with all but eight of these producing gains. However, the depressed market impacted upon Q2 maturities because most products issued within the preceding five years struck at higher index levels. It isn’t all bad news though, as the vast majority of products which failed to mature will have further opportunities to mature, with increased potential returns.

Q2 2020 maturity results. Source:

All Products Lowes 'Preferred' Not 'Preferred'
Number of maturing products 37 8 29
Number returning a positive outcome 17 3 14
Number returning capital only 15 5 10
Number returning a loss 5 0 5
Average total gain (%) 9.02 9.40 8.92
Average term (years) 5.76 6.00 5.70

All Products Lowes 'Preferred' Not 'Preferred'
Average Annualised Return (%) - All 0.72 1.42 0.53
Average Annualised Return Upper Quartile (%) 5.59 3.97 5.75
Average Annualised Return Lower Quartile (%) -5.77 0.00 -7.42

The table above shows that the average annualised return for all structured products which matured in Q2 was 0.72%, with great disparity between the upper and lower quartiles.

Given the state of the markets, it is not surprising that the quarter’s performance is one of the worst the sector has seen. However, the poor performance is largely attributable to high-risk share-linked plans that matured with significant losses, coupled with over 40% of maturities, simply returning capital. Whilst far from ideal, this latter eventuality is not, however such a negative given that the underlying indices to which the investments were linked, in some cases saw double digit falls over the investment terms. This clearly demonstrates the value of the capital protection elements of many structured products.

As for the five-loss making, share linked plans that played such a negative role in the Q2 results, the shares of Barclays, Standard Chartered, and M&S were the issue. Whilst the Barclays price fall due to coronavirus pushed the shares below the 50% barrier, both Standard Chartered and M&S’ share prices were already on their knees, with M&S ultimately dictating the worst performing maturity which delivered a 78.17% loss after over a six year investment horizon.

The standout performers in the quarter were primarily income plans. The top two performers were also share-linked income plans which delivered gross income of 48.24% over six years and a full return of capital at maturity.

The best of the FTSE 100 linked products were contingent income plans, where one had paid all income payments and the other all, but the last, giving total returns of 40.25% and 36.24% over six-year terms.

Fortunately, no ‘Preferred’ plans matured at a loss in the quarter.

With the markets remaining depressed, we expect the story for Q3 maturities to tell a similar story with many fixed term maturities simply returning capital, reflecting falls in their underlying, those that mature with a loss were already forecast to do so and the vast majority of potential maturities are deferred to later years.

Structured investments put capital at risk.

Past performance is not a guide to the future.

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