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What's on the menu? - 15/01/2020

Blair Carmichael, Lowes Financial Management

With over 40 structured products available on the market, (as of January 15th, 2020) some may find it difficult to select the most appropriate options. Below, I have identified some of my current favourite ‘Preferred’ plans and selected them to create a portfolio that could be used as part of an equity alternatives bucket within a wider investment portfolio.

I have diversified the maturity parameters and counterparties in order to ensure that basic diversification is undertaken, which is best practice within any investment portfolio, regardless of risk tolerance. Please note that none of the opinions within this article are to be taken as financial advice, and should you require financial advice, you should speak with a knowledgeable Independent Financial Adviser.

All of the products shown are autocall (kick-out) products, linked to the underlying performance of the FTSE 100 Index, and have the ability to mature from year two onwards, with a maximum potential term of more than six years. Our reasoning behind this selection is as follows:

- Auto-calls statistically increase the probability of a positive outcome for the investor when compared to a product not utilising an autocall feature. The thesis is simple: More chances to mature = increased likelihood of maturity. This is however, assuming that all other terms remain equal.

- The FTSE 100 Index is a broadly diversified, internationally exposed index of significant ‘blue-chip’ equities which is widely quoted and understood by UK investors.

- Each holding will be in force for at least two years, thereby meaning intermediary and brokerage fees have a lower impact on total return compared to products that mature after just one year.

- By having a maximum term beyond six years; we are increasing the number of opportunities for maturity through the autocall, whilst repositioning market risk to an observation point / potential loss trigger some years later.

Well, what’s on the menu? In this case, we consider an investor with a more cautious risk appetite, who is both willing and able to put their capital at risk.

Plan Manager Walker Crips Investec Structured Products Mariana Capital
Plan Name UK 7Y Step Down Kick-out Plan (February 2020) Investec / Lowes 8:8 Plan 15 10:10 Plan February 2020 (Option 2)
Underlying FTSE 100 Index FTSE 100 Index FTSE 100 Index
Potential Returns 7% per year 7.3% per year 10.9% per year
Maximum Term 7 years 8 years 10 years
Autocall Periodicity Annual from year 2 Semi-annual from year 2 Annual from year 2
Autocall Reference Levels 100%, 100%, 95%, 90%, 85%, 80% 92% throughout 100% throughout
Counterparty HSBC Bank Plc Investec Bank Plc Goldman Sachs International
End-of-term Capital Protection Barrier 60% (allowing for up to a 40% fall) 60% (allowing for up to a 40% fall 70% (allowing for up to a 30% fall)
Closing Date 21/02/2020 31/01/2020 18/02/2020
Strike Date 28/02/2020 10/02/2020 21/02/2020

The first plan I have selected is the Walker Crips UK 7Y Step Down Kick Out Plan (February 2020) which contains a ‘step down’ defensive autocall feature, gradually easing the conditions for an early maturity to the extent that if not matured by the seventh and final anniversary, a gain will be produced unless the FTSE 100 Index has lost more than 20% over the full seven years. For this product, the autocall feature will result in an early maturity trigger if the FTSE 100 is at or above the initial index level on the second or third anniversary, with the maturity trigger level reducing to 95% of the initial index level on the fourth anniversary, 90% on the fifth, 85% on the sixth, and finally 80% on the seventh, and final anniversary. The potential return is 7% for each year held. If the FTSE has fallen by more than 40% at the end of the plan’s term, capital will be lost on a 1:1 basis in line with the FTSE. (A 60% capital protection barrier.) The caveat of these terms, as with almost any structured product, is the plan is dependent upon the continued solvency of the counterparty bank which, in this case is HSBC Bank Plc, which has a Standard & Poor’s credit rating of ‘AA-’ indicating a very strong belief in their ability to continue to maintain debt commitments.

Alongside this, I have chosen the Investec/Lowes 8:8 Plan 15, with a defensive 92% observation level, observed semi-annually from the second year onwards, With this plan, the FTSE could fall by as much as 8% (i.e. around 600 points based on an initial index level of 7600), and still grant a return of 14.5% on the second anniversary or, if later, 3.625% for each six month period held (equivalent to 7.25% simple per annum). Certainly nothing to sniff at, especially when considering that the plan still offers a 60% end of term capital protection barrier, observed at the end of eight years. Whilst past performance is certainly not a guide to the future, it should be noted that when backtesting this plan, beginning on any day the FTSE 100 has been in existence, the plan would always have granted a positive return to the investor. This plan is issued by Investec Bank which has a credit rating of ‘A1’ from Moody’s, meaning that they are on the lower end of investment grade relative to other global banks, but are still perceived to have a strong ability to meet their financial commitments.

Lastly, the ‘kicker’ in this bucket to try and offer a more optimistic take on the markets is the Mariana Capital 10:10 Plan February 2020 (Option 2), which may mature from the second year onwards, so long as the FTSE 100 Index is at or above its initial index level on any anniversary. This product has the potential to return a 10.9% gain for each year held, whilst protecting the investor from up to a 30% fall in the FTSE 100 Index on the downside if the plan fails to maturity by its tenth anniversary. The counterparty for the current issue of the 10:10 Plan is Goldman Sachs International; currently rated by Standard & Poor’s as ‘A+’, meaning that they believe the bank has a strong ability to maintain their financial commitments and obligations.

In addition, or indeed as an alternative, the Lowes UK Defined Strategy Fund (UKDSF) may also warrant consideration. Whilst it has different characteristics relative to an individual structured investment due to it being a pooled investment vehicle, the diversification needs are met further without requirement for input from the investor. As of the beginning of January 2020, the fund consists of 20 autocall strategies linked to the performance of the FTSE 100 Index, with a range of kick-out reference levels, and counterparty diversification using 9 different counterparties, in combination with gilts; adopting the credit risk of the UK Government. You can find out more about the fund and the current portfolio at

In a subsequent article I will explore further selections of structured products for those with a more optimistic outlook which, by definition will produce greater returns unless that optimism proves mis-placed. The investments in the subsequent article may complement each other within a wider investment portfolio, potentially for investors with a higher risk tolerance than those with a more cautious attitude.

Structured investments put capital at risk.

Past performance is not a guide to the future.

Disclosure of interests: Lowes has provided input into the concept, development, promotion and distribution of the 8:8, 10:10, and is investment manager for Lowes UK Defined Strategy Fund. Lowes 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.
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