The launch of a new Structured Products section on IFAonline is representative of the huge amount of interest and growing demand for these investments.
Product launches have been coming thick and fast from both established and newer players in the market. Investor enthusiasm for structured products may seem surprising considering the majority are linked to the FTSE and other indices; in these volatile markets, many investors are moving to cash rather than equity-based products. So why are structured products proving so attractive in the current climate and how are they being used by IFAs and their clients?
The different levels of protection available on the products are clearly proving a draw for investors. This allows them to still gain access to the indices of their choice (particularly the FTSE) while taking out varying degrees of protection ranging from a full capital guarantee to soft protection (capital at risk options) which are guaranteed unless the markets fall by a specified level. Performance-wise structured products are measuring up well too compared to trackers, gilt and corporate bond funds.
The range of products on offer is clearly another benefit, from FTSE-linked to more exotic products tapping into the commodities boom, property and emerging markets. There is also the added benefit that income can be taken from some of the products; a key consideration for many investors in any market.
Structured product providers appear divided on what features appeal most to investors. Keydata for example is sticking with its policy of offering capital at risk products which it believes investors want in these volatile times. Keydata sales director Mark Owen says: “In slightly more volatile markets, capital guarantees are a safe haven but you don’t get as good value with these. You are not that geared into the upside as with the money left after the guarantee, you will not get much exposure to the market. One of the risks of structured products is they do what they are designed to do and guarantee your performance in uncertain times but returns can disappear.
“Keydata runs with 50% soft protection so if the market falls by more than 50% it would put capital at risk. However, it is unlikely this would happen and you wouldn’t want to be in any investment product if markets fell that far anyway.”
However, Colin Dickie, director at Barclays Wealth, believes full capital protection is still the most popular. He says the increasing use by IFAs of asset allocation tools is leading them to look at new areas and the capital protected element of structured products is there to reassure investors entering new climes.
“We have seen a move towards new areas and interesting asset classes particularly in a protected format. There has been a rise in demand for commodities and lots of movement out of the traditional product areas and into emerging markets and BRIC.”
However, he says the volatile markets have polarised opinion with other clients backing away from the unfamiliar and putting their money into cash.
“We need to design products to tease that money out of the banks and building societies,” he adds.
Meanwhile, Investec Structured Products, which only launched into the market last week, is hedging it bets by offering a wide range of products which fit investors’ varying risk profiles under four main themes: accumulation, investment, income and structured.
Gary Dale, head of intermediary sales at Investec Private Bank, explains: “We decided not to pigeon hole our structured products to fit specific needs. If we want to grow organically, investors must be given sufficient choice and accessibility. “Structured products are just another way of buying asset classes. In a high volatility and high inflation environment, clients want protection or soft protection. They are getting a geared return but there is a limited downside.”
He believes there is further potential for income products especially those which can be bought through pension wrappers such as SIPPs and used for income drawdown.
However, what all three providers are agreed on is the need for structured products not to be viewed as a stand alone asset class but part of the whole investment strategy. Around a third of advisers still used the vehicles as a stand alone asset class according to the survey on this page.
Owen says: “We would like them to think of structured products as the core and then buy more actively managed products around that. It is important to ask a provider to draw a graph giving the risk and rewards of buying the product. There is a secondary market for structured products too so investors are not locked in.”
He also advises, that in these current markets, advisers look carefully at the investment bank behind the products and check their credit ratings.
Dale adds advisers have to be clear what investors’ objectives are in the medium to long term and their attitude to risk before buying a product. Now more than ever, he says advisers must also manage their clients’ expectations.
“It they are buying capital protection they will get a cash like return plus 2 or 3 % so they shouldn’t expect more.”
The more products that launch into this area the more chance there will be a sea-change and advisers will start to make structured products a more central part of their investment process. If they know that many of the key asset classes are now accessible through structured products with the added benefit of protection, they may find new ways of using them in a client’s portfolio. The volatile markets will no doubt create a resurgence in interest for structured products but providers will be hoping once IFAs and clients have starting to get accustomed to using the products, they will be retained when markets finally pick up again.IFAonline
60+ £300bn ISA savings
Total funds on list rise from 26 to 58
What made financial headlines over the weekend?
Q2 net sales dropped almost 50%