Gary Dale from Investec Structured Products discusses Investec's current collection of Investment Plans
This statement is one that I seem to use more and more when describing how Structured Products can be used. In other words investors have a wide choice of investment solutions at their disposal which can be used during the portfolio planning process to deliver their required objectives.
Structured Products can often be a more efficient way of accessing the return profiles required by investors if used appropriately during the investment planning process. However, let's be clear, Structured Products should complement traditional investments within a portfolio, not replace them. There is rarely a single fund or asset class that can be used in isolation to meet an investor's objectives, hence the importance of diversification and the principles of asset class correlation.
Herein lies the grey area for advisers - how best to use Structured Products during the investment process? "Structured Products should not be viewed as a stand alone asset class" is another statement I find myself using. An adviser cannot include structured investments within a portfolio modelling tool because the models cannot cope with linear and non-linear pay-off profiles. These tools have not been designed to replace the advice process, merely to enhance it. They are a guide for advisers to construct efficient, risk adjusted return profiles to meet specific investor needs. The adviser is able to demonstrate to the investor that whilst the characteristics of the Structured Product are different to that of say, a traditional investment fund, the expected return in certain circumstances can be similar. The key ingredient here is choice.
Investec Structured Products offer a core range of continuously available Investment Plans with a choice of risk profiles matched to specific return profiles. All of our Plans are linked to the FTSE 100 Index, a widely followed and transparent index that is recognised as the benchmark for UK Equity investments. In fact the FTSE 100 is a highly international index. As a whole the companies that comprise the FTSE 100 Index derive more than two thirds of their revenues from outside the UK. We believe that a portfolio with a core holding of the FTSE 100 Index gives a balanced and diversified exposure to world GDP growth.
In the current investment climate many investors are looking to either fully guarantee their capital or at least go some way towards protecting an element of it. In the first 6 months of this year, Structured Products have attracted some £3.8 billion* in new investments with a projected figure of around £8-10 billion by the year end. This is a marked increase over 2007 and we believe is indicative of the fact that investors are seeking to increase their exposure to structured and protected investments across a variety of asset classes. Used as a core holding within an investor's portfolio, Structured Products offer a real alternative to traditional long-only investments.
Our Protected Growth Plan offers 100% capital protection together with 100% participation in the FTSE 100 Index capped at 75% over a 5-year period. Any growth will be treated as capital gains. This Investment Plan is clearly for investors who are still nervous of investing in Equity markets and want to protect their capital, but at the same time would like some exposure to Equity-like returns. It is what we call an "entry level" Investment Plan. In simple terms, the investor is effectively swapping his dividends for capital protection. David Wynn Investment Director, RSM Bentley Jennison Financial Management, says "If this product is going to give you 75% of the upside of an Equity market rally and a 100% capital guarantee I will find that, clients will not move away from that. They are going to understand it, it's very, very simple to understand and it's going to provide them with an awful lot of comfort".
Our Geared Returns Plan is designed to maximise returns in a low growth environment. So what level of return is an investor looking to achieve from a UK equity investment? Assuming high single digit annualised returns of around 8-9% per annum over the medium to long-term, the Geared Returns Plan should outperform a traditional UK Equity tracker. The Plan offers the investor 10 times the growth in the FTSE 100 Index capped at 85% over a 5-year period. Capital is fully protected provided the level of the FTSE 100 does not fall below 50% of its starting level at any point during the Investment Term.
"But why should all Structured Products have guarantees or protection?" This is another favourite comment of mine which leads me on to my last point active versus passive fund management. It is widely reported in many industry publications that few active fund managers outperform their respective passive benchmarks on a continuous basis, and as a result, many advisers are using tracker funds within client portfolios to deliver the Equity returns needed to meet specific objectives. A typical FTSE 100 tracker fund will deliver a total return of typically 50bps, taking into account dividends and annual management charges, thus making no allowance for tracking error.
Compare this with the Investec Accelerated Growth Plan offering 150% of the FTSE 100 Index growth over a 5-year period with only 100% of the downside. True, this product makes no allowance for dividends, however, even allowing for dividends of 4% per annum moving forward, our Plan clearly offers a competitive and attractive return profile with no additional market risk.
Paul Panayi, Director, Optimus Wealth Group says "If a client is considering going into a more risky product shall we say akin to buying a tracker or the index we'd look to one of your products that has a 5 year window and no capital guarantee but can capture the upside up to, I think it's 150%, so why would they go and buy a tracker when they can get that with a plus upside of 150% over 5 years?"
Our Investment Plans will evolve and adapt over time. However, we believe that in the long-term our transparent approach to product design, which offers a wider choice to investors, will help the adviser deliver efficient, well structured portfolios offering guarantees and levels of protection not currently available within traditional fund management.
*Source: www.structuredretailproducts.com
