Ian Lowes, founder of website StructuredProductReview, looks at what products delivered last year and whether advisers can expect more of the same in 2014
Auto-calls were the best performers of the structured products distributed through the adviser market maturing in 2013, according to recent research we have undertaken.
The three main investment types are auto-calls, growth and income products. Auto-calls were by far the most common of all the contracts, accounting for nearly half of all products analysed maturing in 2013. Auto-calls have the ability to mature early on pre-defined anniversaries, if pre-defined criteria are met.
These contracts have been extremely popular among retail investors over recent years, partly because of their track record in producing high single or double digit annualised returns in relatively stagnant markets.
Looking at all maturities, the average annualised return was 8.76%, over an average term of 2.09 years.
However, averages never tell the whole story. Looking at sub-sectors, the average annualised return of Capital at Risk products far outstripped that of the Capital ‘Protected' and Deposit Based contracts, delivering an average annualised return of 9.3% over an average term of 1.95 years.
This is compared to an average of 3.53% for Capital ‘Protected' products and 4.86% for Deposit Based structured products.
It is important to appreciate that timing, contract shape and volume of maturing products in each sub-sector will have significant bearing on these averages.
For example, while it may, at first glance, be surprising that Deposit Based products outperformed Capital ‘Protected' products, as usually the reverse is expected, this is in part explained by the fact the Capital ‘Protected' sub-sector consisted of only five maturities in 2013, with an average duration of 3.99 years, whereas the Deposit Based sub-sector consisted of 21 maturities, which had an average duration of 2.96 years.
The performance of maturing Capital at Risk auto-calls - of which there were 199 - is even more impressive when looking at the top quartile performers. These delivered an average annualised return of 13.99%, and even the bottom quartile produced attractive gains, returning an average annualised gain of 4.43%.
Again, however, this does not give the full picture as products have a variety of underlying investment links. The majority were linked to the FTSE 100 index only but there are a significant number linked to multiple indices, baskets of stocks and commodities and, while the average returns of these sub-sectors were similar, the divergence of returns is clear when looking at the extremes.
Separating the maturities into two groups, the top and bottom quartile average, annualised gains of FTSE 100 only linked auto-calls were 12.34% and 5.24% respectively, while for non-FTSE linked auto-calls, these figures were 15.57% and 1.07%.
As we all know, past performance is no guide to the future; however, the results of this research offers a compelling case for inclusion of auto-call products in investors' diversified portfolios. Given lower funding rates, coupled with lower market volatility, the products set to mature in the coming year did not offer the same headline rates as those maturing last year but will all do exactly what they said on the tin.
The structured product market currently offers a significant array of compelling investment opportunities backed by a broad spectrum of strong counterparties.
While, again, given the vagaries of pricing environments, exact replication of the 2013 results is unlikely, there is sufficient variety of pay-off shapes and protection types to appeal to a large audience and the adviser distributed market looks like it will continue to expand.
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