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Maturity Calling

Ian Lowes, founder of - 04/02/2015

An analysis of the latest maturity results by reveals that structured products maturing in 2014 produced strong returns for investors and in this article we look in detail at how the range of capital-at-risk FTSE 100 linked auto-call (kick-out) products performed.

Auto-call products offer the opportunity for early maturity if pre-defined conditions are met, such as the relevant index to which the product is linked being higher on an anniversary. The average annualised return achieved by the 79 Independent Financial Adviser distributed FTSE 100 linked, capital-at-risk auto-calls that matured in 2014 was a highly commendable 8.76%. This compares favorably with the performance of the FTSE 100 index itself, which made an average annualised return of 6.81% over the same investment periods.

The FTSE 100 index does not account for dividends paid by the shares in the index and to give an indication of the full potential benefit of the dividends, net of fair charges we can look at a leading tracker fund such as the HSBC FTSE 100 Index fund. Whilst the return achieved by the auto-call maturities, on average lagged that of the HSBC fund, which made an average annualised return of 10.38% for the same periods, it is still a very pleasing outcome in light of the fact that the FTSE 100 currently yields circa 3.5%. Also, the value of the significant downside protection afforded by the structured products, with their market protection barriers, must not be overlooked.

Last year was by no means an exception to the rule, as highlighted in the table of results below.

Annualsied Return of Maturities (%)
2012 2013 2014 3 years
FTSE 100 Autocalls 7.71 9.37 8.76 8.81
FTSE 100 (Price only) 3.72 9.59 6.81 7.40
HSBC FTSE 100 Index (TR) 7.14 13.25 10.38 10.98

Over the last 3 years, FTSE 100 linked auto-calls have delivered a return which is better than or in line with the average annualised return of the underlying index. Over the full 3 years, on an annualised basis, these structured products have firmly outperformed the FTSE 100 index (price only). It is recognised that the HSBC FTSE 100 Index fund has outperformed, but the level of underperformance by these structured products is more than acceptable given the built-in protection against market falls.

Delving further into the results reveals further evidence that auto-calls, offering defined returns under defined market conditions, rightfully deserve a place in investor’s portfolios. Over the three years, 2012 to 2014, there have been 256 maturities. When we look at the standard deviation of returns, a measure of volatility, achieved by the three products/indices (shown in the table above), the range of returns for these auto-calls over the three year period is half that of the FTSE 100 and HSBC index tracking fund.

Furthermore, the dispersion of returns achieved by auto-calls is significantly less than that achieved by the FTSE 100 and HSBC tracker fund, as illustrated in the chart below.

Return Distribution for FTSE 100 Linked Capital at Risk Autocalls Maturing: 2012 2014

The number of auto-calls maturing within one standard deviation of the mean, or in other words their distance from the average, return achieved is 82%,. This is higher than that for the FTSE 100 (Price only) index, where 68.36% of results lie within one standard deviation, and the HSBC index fund, at 67.58%.

This highlights another key advantages of structured products, which is their predictable nature, even more so than other passive investment vehicles. Auto-call structured products over the last 3 years have proven they can produce attractive, defined returns, with the embedded nature of the products helped investors to achieve more stable returns with lower volatility.

At the time of writing there are fifteen FTSE 100 linked, capital-at-risk auto-calls in their initial offer period providing a range of different maturity pay-off profiles and potential counterparty diversification across eight different financial institutions. They aren’t right for everyone but as part of a diversified portfolio we believe that this type of investment will help add value whilst balancing risk. But as ever, if you have any doubts as to the suitability of any investment you should contact us for Independent Financial Advice.

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