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Milestone! 1,000 compelling examples - 05/12/2019

Blair Carmichael, Lowes Financial Management

Structured products continue to gain ground in the adviser space thanks in part to increasing awareness helped by continuing to deliver consistent levels of performance, as shown in Lowes Financial Management’s review of the UK structured product sector 1 . Those looking for a simple to understand, tried and tested, defensively positioned, passive investment could do a lot worse than to consider structured products with multiple opportunities to mature, linked only to the performance of the FTSE 100 Index (FTSE 100 autocalls).

Whilst investing in any market linked investment is done on the basis of an expectation that the market will rise, investors must accept that this may not always be the case. All structured products typically include a degree of contingent downside protection against negative market movements. For structured deposits this is absolute, whereas for capital at risk products, if the early maturity conditions are not met by the final maturity date, original capital will still be returned in full unless the FTSE 100 has fallen by more than say 40% in the case of a six year product, or 30% for a product with a ten year maximum term.

Since 2009, no FTSE 100 autocalls have ever matured at a loss. According to Lowes’ database; as of September 2019, more than 1000 FTSE 100 only linked autocalls have now matured in the UK intermediary distributed retail market. These products were issued by more than 20 different banks, such as Barclays, Santander, HSBC, Morgan Stanley and Goldman Sachs. Of these 1000 maturities, two were capital ‘protected’ products, 98 were structured deposits (both designed to protect the original capital from any loss from market movements at maturity) and the remaining 900 were capital at risk products.

The returns achieved by these maturities are shown below, with the capital at risk products returning on average 8.13% per annum over an average term length of just under two years, and the deposits returning 5.08% per annum over an approximate average holding period of just under two and a half years. The two capital ‘protected’ products ran for six years and simply returned the original capital with no gain.

Results from the 1,000 maturing FTSE 100 autocalls from 2009 to September 2019

Capital-at-Risk Structured Deposits Capital 'Protected'
Total Maturities 900 98 2
Average Annualised Return 8.13% 5.08% 0%
Average Term (Years) 1.98 2.46 6

In the first three quarters of 2019, 185 new FTSE linked autocalls were issued in the UK retail space with 9 different counterparty banks behind the scenes. The market now consists of a regular supply of varying shapes, ranging from those that will mature with very attractive gains if the FTSE rises by more than 5% by an observation date, to the traditional ‘at the money’ contracts that will mature when the FTSE is at or above the initial level, to step-down contracts with gradually reducing maturity triggers and defensive contracts which have a maturity trigger which is always below the initial level.

One of the most significant developments in this sub-sector over the last decade has been the extension of the maximum term. This primarily came about as a result of an initiative introduced by Lowes in cooperation with Mariana Capital - The 10:10 plan. So far this year, 83% of all autocalls issued have offered maximum terms of more than 6 years, potentially reducing the probability of a product not maturing with a gain by increasing the total number of maturity opportunities and repositioning market risk by having the capital loss determination point ten years after the start of the contract, observed if an early maturity does not occur.

The current issue of the Mariana 10:10 Plan utilises Goldman Sachs International as its counterparty and offers three options; all of which have a maximum ten-year term but can mature on the second or any subsequent anniversary:

• Option 1 offers a potential return of 8.2% for each year held, provided the FTSE 100 Index closes at or above 102.5% of the initial index level on the second anniversary, or subsequently at or above a reducing reference level thereafter, reducing by 2.5% a year,

• Option 2 requires the FTSE 100 Index to be at or above the initial index level to trigger a maturity and offers a potential return of 10.94% per year.

• Option 3 requires the FTSE 100 Index to be at or above 105% of the initial index level to generate a simple return of 13.47% per year held.

All options contain a 30% capital protection buffer, observed at the end of the 10-year term if an earlier maturity is not triggered.

Along with the 10:10 Plans, the market now offers a broad range of options to the extent that investors and their advisors are often spoiled for choice in creating a portfolio of such strategies, with the aim of generating long term capital growth over the medium term, whether through the medium of a deposit, putting no capital at risk, or through a capital-at-risk structured product, seeking greater long-term capital growth.

1. Structured Products – UK Sector Review: 2009-2018. Lowes Financial Management, 2019. ?

Structured investments put capital at risk.

Past performance is not a guide to the future.

Disclosure of Lowes interests: Lowes has provided input into the concept, development, promotion and distribution of the Mariana capital 10:10 Plans. The provider's charges/fees are built into the terms of the investment - Lowes has a commercial interest in the Plan as a result of its involvement in its development and promotion. All Plan returns are stated after allowing for these charges/fees. Where Lowes is involved in advice on or the intermediation of this investment to retail clients, it will not receive any payment from Mariana for its input. The aim of developing plans in co-operation with providers, with Lowes input, is that they should be amongst the best available in the market - and, as such, be granted 'Preferred' status, on their merits. 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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