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In the wake of the Woodford fiasco...

Lowes Financial Management - 06/11/2019

Geri Ryall, Lowes Financial Management

In the wake of the Woodford fiasco, it’s no secret that Vanguard have reduced the fees imposed on a number of their funds. In light of this, James Salmon from the Mail Online recently compared the performance of the Woodford Equity Income Fund to the Vanguard UK Equity Income Fund. Those investors who followed Neil Woodford to his new venture and invested £10,000 in the Woodford Equity Income Fund at launch would have suffered a loss of £1,467 (at the time of writing). As an alternative, the article showed that an investment in the Vanguard UK Equity Income Index Fund would have grown in value to £12,043, outperforming Woodford by £3,510.

With some investors questioning actively managed funds due to such underperformance and charges, in favour of passive solutions such as tracker funds, is it now time to also consider structured products as an alternative to a passive fund?

Structured products are investments, which are backed by a major bank (the counterparty) where the returns are defined by reference to a defined underlying measurement (like the FTSE 100 Index) and delivered at a defined date (or dates). These can be split into two main groups, capital at risk (structured investments) and deposit plans. Both types of structured product can potentially provide returns in all but severely under-performing markets whilst maintaining either complete (structured deposits) or some (structured investments) downside protection; meaning for the latter, in the event that the stockmarket falls by, say, 40% over the full investment term they will give rise to a loss at maturity. For this reason, capital at risk plans generally provide higher returns than deposit-based plans.

As a company, Lowes did not recommend either the Woodford or the Vanguard funds.

Lowes analyse every structured product launched in the UK retail space and publicly identify which of these we “prefer”, and as such, are prepared to recommend to clients. The FTSE 100 linked structured products that were ‘Preferred’ in July 2014, when Woodford launched were two capital at risk structured investments and a structured deposit.

Had you invested in any of these you would have outperformed not only the Woodford fund but also the Vanguard fund.

For example, the Lowes ‘Preferred’ deposit in July 2014 was the Investec FTSE 100 5 Year Deposit Plus Plan 3 which matured on 19th July 2019 with an interest payment of 26% on the back of an 11.6% rise in the FTSE 100 Index. So a £10,000 investment became £12,600.

Had you invested in either of the other ‘Preferred’ FTSE linked plans, which like the Woodford and Vanguard funds put capital at risk of loss, they would have matured after three years. Even if you just took the maturity proceeds and left them in the bank you would still have out-performed the Vanguard fund to date. But if you had re-invested the proceeds into similar products you would be sitting on significant out-performance.

The capital at risk plans were the Investec FTSE 100 Enhanced Kick Out Plan 45 – Option 2 (UK 5) and the Walker Crips Annual Growth Plan Issue 26, both of which required no growth in the FTSE 100 to mature with a gain. Following the Brexit referendum result in June 2016, the first potential maturities were delayed, however come July 2017 both plans matured returning 24.45% and 22.5% respectively.

A Lowes client who invested £10,000 into the original Investec plan in July 2014 and then in August 2017 rolled their matured £12,445 into the Investec FTSE 100 Step Down Kick Out Plan 13 is sitting on an investment which after accounting for all fees, would return over £13,700 if surrendered today. If he remains invested then, in August next year, if the FTSE 100 is above 6953 his investment will be worth £14,787. The Vanguard fund would need to increase in value by a further 22% to match that return!

This is not an extreme example as had you re-invested proceeds from either of the plans maturing in July 2017 into any one of Lowes FTSE 100 only ‘Preferred’ plans, then based on market values today and considering charges, these would be worth an average of £12,934.57 with similar inherent value that will be potentially realised on future maturity dates and all of which will protect the original investment from all but the most extreme events.

Not many would have thought structured products would outperform Neil Woodford and Vanguard – but Lowes have been bestowing the virtues of carefully selected structured products for long-enough and even took on and beat the Investment Association in a Tracker vs Structured Products challenge.

Structured products are not a direct replacement for investment funds – indeed due to their capped returns we hope they will ultimately underperform diversified, equity linked portfolios, but, given that they provide defined outcomes in defined circumstances and have contingent capital protection we have always held that a portfolio of structures make an excellent complement to other investments.