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'Corona Crash' - 12/08/2020

Josh Mayne, Lowes Financial Management

At the beginning of January, I wrote an article for entitled ‘Boris Bounce’. In that article I commented on a “post-election-bull-market-jamboree” that resulted in a series of autocall plans maturing early in December, plans that otherwise would have missed their respective kick-out levels and continued on to the next observation date. In stark contrast to that, I bring you ‘Corona Crash’.

Between February and April this year markets took a beating at the hands of the coronavirus pandemic, and even now, despite struggling back to ~6,000, the FTSE 100 Index remains almost 1,500 points off where it had started the year .

As a direct parallel to the ‘Boris Bounce’ effect, the markets plummeting this year has meant that a long list of autocall plans did not see their underlying indices reach their respective kick-out reference levels and so will subsequently continue onto the next observation date, accumulating a further potential coupon.

Take for example the Mariana Capital 10:10 Plan June 2017 Option 2. This plan is an at-the-money autocall contract that will mature returning investors’ original capital in full, plus a gain of 8.72% for each year the plan has been in force, provided that on any annual observation date from the third year onwards, the FTSE 100 Index closes at, or above its initial level (7,312.72).

Source: (FTSE 100 Index)

As illustrated above, the plan could have matured this year on 30th June, but with the index considerably below the required level, the plan remains active until the next annual observation date – adding another 8.72% to the potential gain in doing so.

It is with this slither of positivity that I reiterate, it is not all doom and gloom…

Sticking with the same 10:10 Plan as example, the product has an extended maximum investment of ten years, which should provide investors comfort in knowing that there is opportunity for the underlying to recover and for the plan to achieve a positive result. For example, if it takes another seven years for the FTSE to creep back up to the levels at which it was at when the plan commenced in 2017 (the required 7,312.72), the Plan will mature on its tenth anniversary returning investors’ original capital in full, in addition to a gain of 87.2%.

Alternatively, even assuming a sustained bear market for the remainder of the investment term, the plan will still mature returning investors’ original capital in full provided that the Index closes at, or above 5,118.9 on 30th June 2027. This is a function of the 30% European style capital protection barrier utilised by the plan; such barriers will only consider the level of the underlying at the end of term. This feature, combined with an extended maximum investment term, means that a ‘corona crash’ in the underlying mid-term can be overcome with a considerable period for recovery. Its therefore not surprising that such a style of protection barrier has become dominant in the sector, in fact no capital-at-risk plan released in the UK retail space since 2018 has used anything other than a European barrier.

In summary, unlike those in the likes of tracker funds, investors in longer duration autocalls will not be panicking but will, instead be keeping an eye on the bigger picture, focusing on the potential outcomes, rather the daily noise.

For those who are confident that the FTSE will rise, but don’t know by how much, or when, longer duration FTSE linked autocalls have, with very few exceptions, proven to be the perfect complement to a diversified portfolio in the past.

Similarly, structured funds, such as the Lowes UK Defined Strategy Fund, offer exposure to a number of such defined auto-call investment strategies linked to the FTSE or other major indices, ensuring diversification across a variety of counterparties, term lengths and product shapes through the acumen of the fund managers. Thereby such funds will also compliment a well-diversified investment portfolio alongside or instead of individual structured products.

For more information about the Lowes UK Diversified Strategy Fund, please visit here.

Structured investments put capital at risk.

Past performance is not a guide to the future.

The value of investments can fall as well as rise. You may get back less than you invested.

Disclosure of interests: Lowes has provided input into the concept, development, promotion and distribution of the 10:10, and is investment manager for Lowes UK Defined Strategy Fund. Lowes has a commercial interest in these investments as a result of its involvement. Where Lowes is involved in advice on these investments to retail clients, it will not receive benefit of any fees for its involvement, other than those fees payable by the client to Lowes. Lowes has robust systems and controls in place to ensure that it manages any actual or potential conflicts of interests in its activities.
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