Written by Gary Dale, is head of intermediary sales at Investec Structured Products
Of the 105 structured products available at the time of writing, there were 11 Kick-Out plans offered by 9 providers, including Investec's 2 new plans.. However, market intelligence indicates that these kick-out plans are likely to be responsible for up to 30 to 40% of new business volumes across the UK retail structured products market. In short, these products are hugely popular. I will address why later on.
All but one of the plans currently available are linked to the FTSE100 Index, highlighting again the popularity of this underlying within the structured products industry. Advisors and clients feel comfortable taking a view on the UK's leading Index as opposed to some of the other Indices available. Currently, there is one product available which is linked to two Indices, the Hang Seng and MSCI Taiwan, and which offers a possible kick-out on the 3rd anniversary or if not a 250% participation rate in the average growth across the two underlying Indices'. However, the view within Investec as I've commented on before is that the FTSE100 is more of a global Index than it is given credit for, with the UK's top 100 companies deriving more than two thirds of their revenues from outside the UK. The Index also sits comfortably within the core of any investment portfolio providing a strong benchmark for equity growth.
Before Investec Structured Products launched our first two kick-out plans, all but one of the plans available were structured notes/preference shares with growth potentially taxed as capital gains. For a UK resident taxpayer, this is obviously the most efficient way to structure this type of plan, however it excludes the use of the Offshore Bond wrapper which is a huge part of the investment market for IFA's in the UK. This point was taken into account when we put the Investec proposition together.
Our first decision was to launch two separate types of plan, a structured deposit and a structured note, simply to capture as wide a client set as possible. We offer this theme of deposits and notes across our other continuously available structured plans, so it is important that we continue to offer such choice to advisors. In addition, by offering a deposit structure, we open up this product type to clients who do not want to take any risk with their capital, as most of the other plans available are capital at risk with the usual 50% soft protection. Our deposit Plan, the Guaranteed 5 Year FTSE 100 Kick Out Plan 1, offers a 100% capital guarantee and is also protected by the Financial Services Compensation Scheme (FSCS) up to the value of £50k per authorised institution, per individual client. Choosing the underlying was the obvious part of the building process for the reasons I have mentioned above so the FTSE100 is the Index of choice used in both plans.
The Investec Guaranteed 5 Year FTSE 100 Kick-Out Plan 1 is our structured deposit offering the following benefits:
- 100% of FTSE 100 Index growth over 5 years with no upper limit
- Potential for early maturity at the end of years 1, 2, 3 or 4 with a fixed payment equivalent to 10% gross pa (not compounded)
- 100% capital guarantee with the initial investment covered up to £50k within the rules of the FSCS
- Maturity proceeds taxed as income if held directly however for gross/tax-deferred returns, can be held within an ISA, SIPP/SSAS pension scheme or within most offshore investment bonds
- Trustees, Corporates and Charities can also invest in the Plan
The Plan will mature early provided that at the end of years 1, 2, 3 or 4, the level of the Index is higher than the initial Index level; therefore the pay-off profile of this type of product is straight forward and very easy for an investor to understand.
The Investec 5 Year FTSE 100 Enhanced Kick-Out Plan 1 is our structured note offering the following benefits:
- 120% of FTSE 100 Index growth over 5 years with no upper limit
- Potential for early maturity at the end of years 1, 2, 3 or 4 with a fixed payment equivalent to 15% gross pa (not compounded)
- Your initial investment is at risk if the FTSE 100 halves at any point during the investment term
- Maturity proceeds potentially taxed as capital gains if held directly however for gross returns can be held within an ISA or SIPP/SSAS pension scheme
- Trustees, Corporates and Charities can also invest in the Plan
The early maturity feature of the Enhanced Kick-Out Plan works in exactly the same way as the Guaranteed Plan, however it contains an element of capital risk for the investor. Intuitively this makes sense because of the higher annual coupons available from the Enhanced Plan. However, what appears more risky to one client will not necessarily be the same for another. This is where choice is important for the advisor. If an annual kick-out/early maturity return profile for a client is required, then an advisor's only choice, prior to Investec launching and with the exception of the current Axa International plan, was to offer a capital at risk product taxed potentially to capital gains tax. Whilst this type of product is evidently more tax-efficient, clients may have had to re-address their appetite for risk to achieve their desired pay-off profile. By offering real choice at the risk tolerance stage of the advice process, advisors are much better equipped to match specific products and pay-off profiles to suit a client's realistic expectations.
Product positioning and delivery to market is hugely important in changing IFA's perceptions and understanding of the structured retail products market in the UK. Get this part right and the industry will benefit from exponential growth in this sector.
We have already seen in excess of 35% growth from 2007 to 2008 with total volumes growing from £6.7bn to £9.1bn.. The detail makes for more interesting reading. Of the 741 products issued in 2007, only 19 were income products, accounting for sales of £129m. In 2008, this number jumped to 58 of the 976 products issued, accounting for total sales of £442m. This income figure is not wholly unexpected given the fall in interest rates and rise in market volatility, so what does 2009 hold in store. Well, so far (less than 1 month!), we have seen sales of c£1.8bn with 176 products already issued. 18 were income products, accounting for sales of £118m, further highlighting investor demand for income-style products. We expect 2009 to be a bumper year in the world of structured products, however to maintain momentum, product development must be tailored to suit an investor's requirements and also match their expectations.
I mentioned at the start of this article that kick-out plans are hugely popular and I believe that there are two key reasons why this is the case. The first relates to the pay-off profile; it is extremely easy to understand across all products of this type. Advisors and investors know exactly what they will get back, and when, given specific investment criteria being met. And the second, is that not the most obvious?
Statistical information source: StructuredRetailProducts.com
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