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Volatility Good News for Structured Products

Joshua Wynn - 12/12/2018

With political uncertainty impacting investor confidence, structured products can offer both a port in the storm and greater returns in times of market volatility.

No one knows where Britain will be in six months’ time. ‘Probably still somewhere in the North Atlantic’ is as close as we can get, but our relationship with Europe in respect of political distance is still very much up in the air. European indices reflect a period of turbulence and in the case of many investments this volatility will have had a negative impact – yet the returns offered on issues of structured products in recent months have outmatched those of any other point in the last twelve months. Here I’ll be comparing a few current UK Index-linked issues to the slim pickings from this time a year ago, exploring why, despite the bleak weather out of doors, the sun shines on structured products.

Mariana 10:10 Plan December 2017/18 (Option 1)*

This ten-year kick-out plan, the product of a joint Mariana-Lowes effort, has been popular with investors since its first issue in 2015 (which matured last October). With Natixis as counterparty, the plan’s current issue offers 8% per year, up from 7% in December 2017; defensive features enable it to produce positive returns even in negatively performing markets. The term of the plan can span up to a decade, which (as economists will tell you) is the usual span between serious market corrections, so basically it was built to survive the apocalypse and inherit the earth afterwards – well, not quite, but you get the point.

Meteor FTSE 100 Kick Out Plan December 2017/18*
With exposure to BNP Paribas, the Meteor FTSE 100 Kick Out Plan’s returns have seen a 2% rise in comparison to last December’s issue – now at 10.5% per annum. This at-the-money plan will generate returns in stable or growing markets and one would hope that its six-year term would long enough for it to do so.

Investec FTSE 100 Kick Out Deposit Plan 73 (Option 1)/82 Deposits have been something of a favourite of mine this year, with more than one article being devoted to their merits as vehicles through which more cautious investors can maximise returns on their savings. Fresh off Investec’s structured production line is their FTSE 100 Kick Out Deposit Plan 73; this six-year deposit now offers last year’s return and half again. 6% may be low compared to the two investment products above, but for a deposit this is a pretty astonishing return. The plan can kick out from its third year (three years is a common lock-in period for a bank deposit), with annual potential maturity dates thereafter.
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How serendipitous that all three of the plans in this article were pretty much identical to their predecessors – even the counterparties (which have varied over the year in both non-Investec cases) landed right. In addition to the boost in offered returns from recent volatility, the rise in the Bank of England’s base rate from 0.5% to 0.75% in August, which benefitted many banks’ funding rates, will have also contributed to the current offers.

It is important to acknowledge the flip side of the volatility coin: that some current investors in growth or kick-out products may find their returns and/or opportunities for early maturity negatively affected, albeit some comfort can be gained from the news that the FTSE 100 would need to fall another 40% before triggering losses on linked plans.

Overall, it seems the stars have aligned for this article. And what do they say? That Christmas 2018 could turn out to be quite the gift structured-product wise, if not Brexit-wise… take it where you find it, I guess.

*Both the Mariana 10:10 Plan December 2018 and Meteor FTSE 100 Kick Out Plan December 2018 place investors’ capital at risk.

Disclosure of Lowes’ Interests

Lowes has provided input into the concept, development, promotion and distribution of the 10:10 Plan. 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 the provider’s charges/fees. Where Lowes is involved in advice on or the intermediation of this investment to retail clients, it will not be paid any fee 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.

Joshua Wynn
Lowes Financial Management