The first thing to say about structured products is that we should probably call them something else. All products and investments are structured in some sense.
‘Structured products’ as commonly known can be thought of in terms of the benefit they are usually designed to achieve – some form of protected investment experience. In general, this means an involvement in equities or equity-driven performance but with greater predictability or a narrower (or fixed) range of possible outcomes - often including protection for the investor’s initial capital.
Essentially, then, we mean some kind of equity-based upside potential with levels of capital security for the investor. A middle way between cash and unprotected equities. Put like that you might imagine these products to demand a dominant place in the portfolios of “Middle Britain” – yet the reality is very different.
The market for protected investments
An enormous amount of money - £567bn – currently sits in cash deposits (source: British Bankers Association April 2008). UK equity funds, although considerably less popular than cash, still have around £311bn invested (source: IMA April 2008). How does the structured product market compare? As of June 2008, the amount of money invested in ’live’ structured products stood at just £31bn (source: stucturedretailproducts.com).
The question is - why? How much does anyone need in accessible cash deposits? Are most consumers’ needs really met by the typical capital-at-full-risk product otherwise known as the equity ISA or OEIC/unit trust? We believe there is a case for a radical reassessment of the role of protection or risk management in retail portfolios. Protected investment solutions are much more commonly adopted elsewhere in the world, but in the UK the “equity cult” has been virtually omnipotent. It is, in some ways, an inexplicable phenomenon.
Protected investments offer more than simple long-only guesses – they take some of the thinking in the most sophisticated wealth management circles and convert those techniques into accessible solutions for the retail investor.
Portfolio construction
Risk management in portfolios has become more sophisticated in recent years but most retail portfolios attempt to manage risk by asset allocation systems, adjusting weightings between equities, property and fixed interest vehicles. When these asset classes move in tandem - as they often do - then diversification is illusory and client capital is exposed. For the most sophisticated investor it may just be that this conventional active portfolio management meets their long-term needs. But for the majority of investments there is a case for allocating substantial elements of the portfolio to vehicles which deliver more predictable returns, protecting some or all of the capital invested and allowing greater security in long-term financial and life stage planning.
Growth products with in-built protection are typically index driven and fall into two categories. Where the index or equivalent is mainstream – i.e. the FTSE100 - then the product will typically offer some form of geared exposure in return for a defined or capped return. As such these investments offer materially higher potential returns than available from cash deposits but without the risk to capital inherent in unprotected equities. The second category of growth product offers exposure to less mainstream investment areas, such as emerging markets, commodities or specific country markets like China. These may or may not offer geared exposure but should in our view offer uncapped exposure as a reward for maintaining the investment for the defined, often five-year period.
Protected Investments as a form of customer relationship management
During a prolonged bull market clients will typically be delighted by a flow of positive annual or half yearly reviews. But in more difficult times, such as these, many advisers will experience challenging discussions with clients who, whilst appreciating at an intellectual level that values may go down as well as up, do not at an emotional level connect with this essential truth. Many advisers still remember the fall-out from the tech bubble and some will have experienced client loss as a result. By contrast, using protected investments takes some of this uncertainty away and may be a suitable response to clients who find surprises an unwelcome part of their wealth management experience.
Protected Investments to avoid the market cycle handicap
Arguably the biggest single issue in UK financial services is the fact that retail investment sales track the performance of the market. A buoyant stock market is reflected in buoyant retail sales. The result is that headline performance figures for retail investment funds are rarely experienced by those buying the funds. This tracker effect is also seen for fund sectors and for individual funds – a top fund manager is rarely spotted prospectively. Investors have never been able to break this vicious cycle. But we think they can simply by placing more emphasis on protected investment vehicles.
The Barclays Wealth range
Barclays Wealth offers a constantly updated range of growth and income products as essential tools for professional advisers in their portfolio construction. For full details and to register for our Guide to Structured Products go to www.barclaysinvestors.com/ifa
