Gary Dale head of intermediary sales, Investec Structured Products, answers questions from Tim Mortimer of Future Value Consultants on the current state of the UK structured products market.
Do you think there is a fair understanding of structured products in the UK retail market?
Yes, but the UK structured product market needs to be redefined and re-positioned. Many in the financial services sector promote structured products as a stand-alone asset class but, we believe structured products are simply an alternative, in some cases more efficient, way of accessing specific asset classes. Rather than being seen as an alternative to equities they should be seen as complementary and a means of tailoring an investor’s return profile across their entire portfolio.
The structured product market is at a crossroads and it is imperative that the industry re-defines how structured products are presented, and more importantly used, within portfolio management. Clients’ objectives are delivered through careful investment planning and risk management techniques to tailor return profiles appropriately. Investec, in designing its collection of structured plans, aims to deliver a range that enables advisers to deliver these objectives in a simple and transparent way.
What changes have characterised the structured product market over the past few years?
The biggest change we’ve seen is the increase in the number of manufacturers and distributors. Add to this the wider variety of underlying asset classes used and the greater complexity in wrapper construction and one could argue that this marketplace has become a lot more complicated over the past few years. This is making it more difficult for advisers and investors to fully understand some of these products and make an informed choice as to which plans should be used. All too often the industry has become absorbed by high headline numbers and attractive rates of income instead of fully understanding how structured products can be used to complement the investment process. Change and development are both good for this market but it is important that change is not for changes sake, but for the benefit of the investor.
What impact do you think the credit crisis and current economic slowdown will have on retail uptake of structured products?
The credit crisis has reinforced the point that advisers need to take great care in understanding the risks within particular products. Guarantees and third-party protection need to be fully understood and explained to clients. We believe that the credit crunch and current economic downturn offers the perfect platform with which to demonstrate the unique ability for structured products as investments, in balancing a client’s expected return profile together with their appetite for risk. Faced with increased volatility and possibly lower returns, we expect many investors to be looking at ways to decrease investment risk while maximising growth opportunities. For example in our Geared Returns Plan we recognised this, and it made sense to design a product that offered 10 times the upside in the FTSE 100 with a cap at 70%. In other words, the FTSE 100 only needs to grow at 1.4% per annum to maximise the return available. Capital is at risk if the FTSE 100 halves in value and does not recover to its original level over the investment term.
Why are you launching a collection of structured products?
We see the UK structured products market as having huge growth potential. Historically UK structured product sales has underperformed in comparison to its European peers. There are many reasons for this, but primarily it is due to different distribution models and a greater appetite among UK investors for traditional equity funds. European investors have tended to prefer fixed income-type returns.
The recent growth in the US structured product market gives us confidence the UK advisory market will follow the US model and utilise structured products as alternative and complementary medium-term growth investments. We believe the catalyst to success will not be product innovation but a development in the understanding of how to utilise structured products effectively to offer attractive return profiles, balancing the risk of the investor’s overall portfolio. Structured products can achieve this in a range of environments, whereas traditional long-only funds are far more one-dimensional. The current market environment gives a perfect opportunity to demonstrate the effectiveness of using structured products within a wider portfolio.
How will Investec’s collection of structured products look?
We are offering a collection of competitive and continuously available products that are designed to have wide appeal among investors.
To help advisors and investors alike we have categorised our products into four key themes:
- Accumulation plans are generally quite conservative and are designed to guarantee the initial deposit at the plan maturity date, and, at the same time to outperform ‘cash like’ investments; and
- Investment plans are more growth focused and are designed to deliver accelerated asset growth in both a protected and unprotected way.
- Income plans are designed for investors looking for superior income while minimising the risk of capital loss;
- Structured funds involve using derivatives to develop a range of funds designed to create performance characteristics that are complementary to investors’ existing portfolios.
As an example of our new approach to this market, within our investment plans we are delivering a plan that offers a return profile suitable to clients who are willing to accept the risks inherent in investing in the UK equity market. This plan offers a one-for-one downside with no guarantees or protection but, in return, delivers an uncapped geared return of 170% of the growth in the FTSE 100. We believe that structured products do not always need to focus on guarantees or protection to make them attractive. Our approach is to design plans that can be used to complement and enhance an investor’s existing portfolio beyond what is possible with traditional investments.
Finally, in addition to our continuously available retail plans we will be offering a bespoke service to allow advisors to design products to meet specific investor needs.
Tim Mortimer is managing director of Future Value Consultants. FVC publishes in-depth research on the structured products market which can be found at www.futurevc.co.uk/research. FVC does not endorse products from individual companies.
