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An investment in knowledge pays the best dividends... - 02/06/2021

In May we were disappointed to read a retail audience facing advertorial written by an independent financial adviser, purporting to be knowledgeable and declaring that “structured products aren’t quite what they seem”. Consistent with views typical of the early 2000’s and indeed voiced then, by the same author, the article goes to lengths to dismiss structured products and in particular, kick-out plans. Those with strong views against the sector are now somewhat less commonplace given its track record and so it is bewildering to see a public commentator, particularly an independent financial advisor, not only harboring but broadcasting such outdated arguments to potential investors and clients alike.

In this piece I would like to review some of the claims made in the article, ultimately reaffirming that structured products are quite what they seem and represent a credible investment decision as part of a well-diversified portfolio.

Initially, the author refers to structured products being sold as a ‘variant’ of guaranteed equity bonds, using the term guaranteed to critcise structured products as naturally, their performance is not guaranteed. The issue with this criticism is that the term guaranteed isn’t used to describe any aspect of structured products and hasn’t been for certainly over a decade. Structured products are subject to risks, as with most investments, and the disclosure of said risks in a clear, fair and not misleading manner is, and has been for some time, an FCA requirement.

A fundamental benefit of structured investments is that a series of defined outcomes can be considered given the nature of the contracts (ie potential 18% gain on the second anniversary), though these outcomes are not guaranteed; returns are often contingent on the performance of an underlying asset or index, and the capital return at maturity is again contingent on said performance. As mentioned, product brochures and regulatory Key Information Documents are fundamentally required to disclose this contingency, be it in terms of capital gains or capital preservation. As such, any claim that structured products on the whole are sold as being ‘guaranteed’ contracts is alarmingly outdated, representing a lack of willingness to understand the sector.

The author alludes to better alternative investments by reference to the FTSE 100 Index, placing emphasis on the (lack of) receipt of dividends, and capped growth potential, eventually summarising that investors would be better suited in other FTSE-linked passive investments.

Whilst correct in his statement that ‘you are never invested in the FTSE 100’ and consequently ‘you do not gain any dividends’; the value of dividends hasn’t simply vanished but rather the forecasted dividend yield is reflected in the terms offered by the counterparty – implicitly benefitting the end investor.

The author chooses to ignore the value of the features embedded within structured products. For example, whilst capital-at-risk products ultimately place capital at risk, they offer a degree of downside protection through their European capital protection barriers (ie capital returned in full unless the underlying is down by more than 40%). Furthermore, structured products can be designed in a way that handsome returns are achievable in flat, or even declining markets. In such market conditions structured products would outperform alternative passive investments such as tracker funds.

To the test the authors’ hypothesis, I have compared a recently matured structured product with the HSBC Tracker Fund, which is widely accepted as a suitable proxy for the FTSE 100 ‘Total Return’ Index. The returns are based on the three and a half years between 10th November 2017 and 10th May 2021. I have selected a FTSE-linked capital-at-risk autocall product to demonstrate this – it is worth noting that this product shape has become the most commonly issued structured product in recent years.

As observable, the maturing structured product’s annualised return (6.03%) convincingly outperforms that of the HSBC Tracker Fund (2.56%), which benefits from FTSE 100 growth including dividends. Walker Crips Semi-Annual Step Down Kick Out Plan November 2017 matured after three and a half years, returning investors original capital in full in addition to a total gain of 22.75%, despite the FTSE 100 Index being 4.16% lower than the strike level recorded in November 2017. Maturity results like this are far from uncommon, as reflected by the average annualised return of FTSE-linked maturing products in 2020 (4.54%), 2019 (5.99%), 2018 (6.67%), 2017 (7.07%), 2016 (5.87%) and so on (data sources from the database).

In this case, investors would have been better rewarded for investment in structured products than in FTSE 100 tracker funds, such as the HSBC Tracker Fund. This is not a function of the coronavirus market, its something that has been observable for some time. In fact Lowes won a 6 year challenge with the Investment Management Association (IMA) when we pitted our structured product portfolio against the IMA’s choice of tracker; the very same HSBC fund. Structured products have proven their worth for hundreds of thousands of UK retail investors. For public commentators to deter investors from what has proven to be an exceptional investment areas is grossly naïve, if not negligent. We would urge all independent financial advisors and public commentators with an opinion to invest in knowledge by availing themselves of the ample research and evidence that can be found on supporting the credibility of structured investments as part of a well-diversified portfolio.

Structured investments put capital-at-risk.

Past performance is not a guide to future performance.

FTSE 100 data source:
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