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Blending structured products to enhance returns

Christopher Brown, - 26/11/2014

When investing, allocating your capital to different investments increases the potential for enhanced returns while simultaneously moderating risk. There are several structured products currently available, which when combined in a mini portfolio complement one another to produce a better potential outcome by diversifying the level of market risk and counterparty exposure.

Firstly, the Societe Generale UK Kick-out Plan (UK Four) Issue 11 offers an attractive 9.25% gain on the net invested capital for each year held, payable from the second anniversary onwards if the FTSE 100 closes at or above its initial level. While all the plans mentioned here put an investor’s capital at risk in the event of adverse market conditions, they do not come without a degree of protection. This Societe Generale plan is protected from market movements unless the FTSE falls below 50% of its initial level on any day during the investment term and fails to recover by maturity, in which case the invested capital will be reduced by 1% for every 1% the FTSE is below the initial level.

Furthermore, the plan's collateralised structure means that exposure to counterparty risk is spread evenly over four UK institutions (Aviva, Barclays Bank plc, Lloyds Bank plc and The Royal Bank of Scotland plc). In the event of the default of one of the institutions, only the relevant portion of the invested capital will be exposed to that counterparty’s credit risk. According to ratings agencies, these institutions all have a 'strong' capacity to meet their financial obligations. As such, this structured product on its own offers an attractive risk/reward profile, while the early kick-out feature offers the potential to consolidate growth in positive market conditions.

Investor returns can be enhanced by introducing another plan to a diversified mini-portfolio, but this time a growth product. The Morgan Stanley FTSE Defensive Supertracker Plan 7 offers a growth at maturity of 3.2 times any rise in the FTSE 100 Index (capped at 64%), from 90% of the Initial Index Level. This means that the plan will achieve its maximum growth potential if the index rises by just 10%, and will produce a gain even if the FTSE at the end of the investment term falls by up to 10% of its initial level. The plan will only give rise to a loss if the FTSE falls below half of its initial value at maturity, and is linked solely to Morgan Stanley as counterparty, which has an ‘A-’ rating from Standard and Poor’s. As such, investing in this plan alongside the Societe Generale product will provide an added dimension of diversification to counterparty exposure whilst concurrently offering an appealing growth return.

To further complement a mini-portfolio, investors may wish to add another kick-out product and diversify counterparty exposure even more. The Walker Crips Dual Index Plan (FTSE & EURO STOXX) Issue 6 is a maximum six year investment, offering the potential for a 12% gain on the original investment for each year the plan is in force, with a kick-out feature that produces an early maturity from the first year onwards if both the FTSE 100 Index and EURO STOXX 50 Index (covering the largest 50 companies across 12 Eurozone countries) close at or above their respective initial index levels. Here, the return is measured against the closing levels of the worst performing index. For example, if the plan does not kick out and the FTSE 100 is above its respective initial index level by maturity, but the EURO STOXX 50 is not, the invested capital will be returned without any growth payment. It must be noted that the high potential coupon is the reward for the exposure to two indices, which increases the risk of the capital protection barrier being breached. The capital protection barrier this time is set at 40% (observed at maturity only), and this investment is backed by Santander UK.

This combination of products allows investors to consolidate their returns while the market is up with kick-out features (Societe Generale and Walker Crips products), but still benefit even if the market is slightly down (Morgan Stanley product). The mini portfolio also provides a generous level of protection against capital loss and diversifies credit exposure across six different financial institutions (all products).

Assuming an equal split across the above three products and assuming all the counterparties remain solvent, if the FTSE rises by 10% or more over the six years the portfolio will produce gains between 31.5% if the auto-call plans kick out on the first opportunity, and 63.8% if the kick-outs occur after six years. Given the same assumptions the portfolio will not give rise to a loss unless the markets suffer substantial losses and the barriers are breached.

Indeed, many other investments could outperform a portfolio of this kind in certain market conditions. While we would expect that our clients would also be exposed to such alternatives, this article demonstrates the potential that structured products present for attractive growth even in unfavorable as well as positive market conditions.

The mini-portfolio discussed here can also be managed through our dedicated portfolio management portfolio tool, has been designed to provide you with a better perspective of the structured products you hold - all in one place. The service is currently free when you make an investment through

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