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First Impressions on Structured Products

Sean McPhillips, Lowes Financial Management - 18/10/2017

I am a relatively new starter within Lowes Financial Management working in the structured products team for just a few weeks so I cannot deny that my experience is limited. However, as structured products and investments generally are a relatively new and fascinating world to me, my stance on structured products is based upon first impressions and is developing quickly.

In looking at current products, previous offers and the range of written material surrounding the sector, I have great difficulty in seeing the relative downside of them or, the reason why they may be controversial. Yes, I am aware of ‘precipice bonds’ and the destructive effects that the fall of the Lehman Brothers had on the sector. However, it is perhaps because I was not in the profession at the time that it does not shape my opinion. I instead am focusing on the current state of the structured investments sector and am interested in its future.

Putting it simply, to me, the advantages of utilising structured products in a portfolio are that the usual investment risks such as market downside, volatility and poor fund management can be replaced with known credit risk, defined returns and clear capital protection barriers. The Lowes 2017 Structured Products Maturity Report found that 89% of all products maturing in 2016 generated positive returns, with 8.9% returning capital only and 2.1% (9 products of 427) returning a loss to investors’ original capital.* Over 70% of maturities were linked solely to the FTSE and none of these products gave rise to a loss.

Obviously not all investments perform well and clearly higher potential returns often result in significant losses as was seen with the maturity of the Merchant Capital Kick Out Plan: FTSE Oil Issue 2 last year with a loss of 76.21% after 5 years. There is also counterparty risk to consider, as a default could result in a significant loss of capital and lengthy recovery processes for any balance. However, with the risk comes the reward, as we can see in last year’s maturities which were overwhelmingly positive in terms of returns. We are under no delusion that all structured products are good (as we can see above), but it does seem that with requisite knowledge worthwhile product selection is not onerous.

Although the potential returns from structured products may not be as significant as those from equities, we operate in a world where clients care much more about wealth preservation and so avoiding a loss often takes precedent over achieving huge gains. Owing to the psychology of investing, whereby the damage of a loss far outweighs the excitement of a gain, structured products appear to be a sensible option for a variety of risk profiles. This is not to say that structured products do not offer attractive returns. Looking at the list of products that matured this month it is clear that returns of around 8% per annum have been common and I can see that of the products currently on offer, several offer similar potential rewards.

I appreciate that its early days and my view will have been skewed by my employer’s passion for the sector but structured products appear to be valuable investments to include in diversified portfolios, offering the potential of pre-defined returns whilst mitigating risk. They have been consistent performers in the portfolios of Lowes’ clients and continue to be utilised, yet I am told that they are far from mainstream and as such, it seems that many investors across the nation are missing out on them. The simple fact is that numbers do not lie and anyone who looks at the data Lowes has published would surely not dispute the value of structured products. If you disagree with my thoughts and are not prepared to recommend, or utilise structured products in your own, or your client’s portfolios, I would be delighted to hear from you to explain what it is that I am overlooking.

*Please note that Lowes only monitor the Structured Products launched in the UK that are promoted through Independent Financial Advisors and other wealth managers. This data does not incorporate private placement trades or products distributed solely through closed or restricted channels.