Joshua Wynn - 20/03/2019
Structured products are remarkably useful tools in an investor’s portfolio for targeting both generic and specific investment goals, because their terms are clearly defined from the outset and the risk they incorporate can be matched to the risk appetite of the investor with relative ease. What follows are examples of products currently available to UK retail investors and how they meet the objectives presented in some hypothetical scenarios.
A forty-year-old gentleman who is on the adventurous side of the investing spectrum is looking to put his savings to work, with an eye to retiring a little earlier than his current workplace pension scheme will allow. Having been excessively cash-heavy, his investable capital has been formed into a diversified portfolio, including some structured investment holdings. One, the Mariana 10:10 Plan May 2019 Option 3, provides exposure to UK equity markets with the aim of capitalising on market growth over a maximum of ten years. If the FTSE 100 Index grows by 5% or more by May 2021, 22, 23 through to 2029, the plan will mature and produce a gain of 12.8% (simple) for each year held. Investors may lose capital if the plan does not mature early and the index has fallen by more than 30% at the end of ten years, if the plan is surrendered early or the counterparty bank fails (as is the case with all capital-at-risk structured products).
This businesswoman has a very specific goal; her twelve-year-old daughter is as clever as a bag of snakes and, when the time comes, is hoped to head off to a distinguished university and bring back a mortarboard. However, student grants are not what they used to be, and the mother wishes to make the savings she has already put away over the years for the occasion do better than they are in fixed-term bank deposits (which barely tread water when inflation is taken into account). The Investec FTSE 100 6 Year Deposit Plan 10 fits the bill quite well, given that it does not put capital at risk and will produce 42% interest at the end of the six-year term if the FTSE is higher than it was at the beginning – far outstripping any high street bank deposit account in growing equity markets.
ISA season is upon us; HMRC chortles with rapturous glee at all the unused allowances this year as clients line up at the door to see what magic their advisers can work for them. The latest Investec/Lowes 8:8 Plan offer period conveniently straddles 5th April like Colossus over Rhodes Harbour. The plan offers a potential return of 7.6% for each year it is in force, with the ability to mature semi-annually from its second anniversary, if the FTSE 100 is at or above 92% of its initial level; this defensive feature means that the 8:8 Plan is able to generate positive returns, even in slightly falling markets.
With a villa in Majorca where they spend a quarter of the year, these two married retirees have no qualms about some European exposure, especially when it boosts their returns potential. Their main aim is to leave as much to their children and grandchildren as they can manage without affecting the brunching, National Trust, semi-expatriate lifestyle they now enjoy. Dura Capital’s Credit Suisse FTSE/Eurostoxx Defensive Autocall Plan 26 has a maximum term of eight years (potentially returning 8.75% for each year), but can mature as early as the second anniversary if both the FTSE 100 Index and the Euro Stoxx 50 Index are above a reference level which begins at a par with the levels observed at the start of the term, but reduce as the plan continues, thereby increasing the chance of a positive maturity as time goes on.
The skeptical investor, perhaps a little green about the gills when it comes to structure investments, would probably find Meteor’s FTSE Kick Out Plan a digestible concept. Linked to the FTSE 100, the plan can mature from its second anniversary and run to a potential seven years, with the current issue offering a gain of 10.5% for each year held, if the FTSE is at or above the level it was at the beginning of the term. As is the case with the Investec / Lowes 8:8 Plan, investors will take a loss if the index has fallen by more than 40% at the end of the plan term.
The financial toolkit is a broad and varied arsenal, of which structured investments and deposits are but one element – the challenge has often been to find the right one to fit the job and so increase positive outcomes. Whilst most of the above will fit the bill in many circumstances, the accepted wisdom is that a blend of some or all of the above (alongside other assets) would add definition and better risk metrics to a portfolio. Today such a vehicle is readily accessible providing access to all of the above and more, without the repeated administration burden of selecting, monitoring and reinvesting maturities; that vehicle? It’s a fund!
Disclosure of interest: Lowes has provided input into the concept, development, promotion and distribution of the 10:10 & 8:8 Plans and 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.
Structured investments put investors’ capital at risk.