Structured products are not offering investors the dividend yield on underlying indices, now respons...
Structured products are not offering investors the dividend yield on underlying indices, now responsible for 40% of the total gain available in the UK market.
Protected vehicles are typically based on capital-only indices and their growing popularity comes at a time when leading fund managers such as Leigh Harrison of Credit Suisse are predicting yield will form a larger component of total return.
He said yield will contribute around 50% of overall gains, compared to just 10% in the late 1990s.
While currently below its historic average level of 4.8%, dividend yield on the FTSE All-Share is on an upward trend after reaching a 70-year low of just over 2% at the height of the technology bubble in January 2000. The yield has now reached 3.7% and is set to continue growing, according to head of strategy at Isis Asset Management Paul Niven.
The current focus on income investing has not curtailed growth in the structured product market, however, despite the majority of such schemes linking to capital-only indices.
According to figures from analysis website StructuredRetailProducts.com, there have been 294 structured product launches over the year to the end of June, compared to 306 over the whole of 2002 and 255 during 2001.
The growth focus of this area of the market is evident from the fact that of the products issued so far this calendar year, some 87% have been growth-type schemes.
Managing director of research house Future Value Consultants, Tim Mortimer, said there is a definite trade-off in structured products, with investors giving up the typical dividend stream from equity investment in exchange for either a set income or some degree of capital protection, depending on the product.
'While structured products will not benefit directly from increasing dividend yields, as a general rule, increasing dividends will be the result of better prospects across the market,' he said. 'Schemes should benefit from subsequent capital growth in their underlying indices.'
Protected product investors also benefit from improving dividends in the form of superior protection and upside potential terms, according to Robert Benson, founder of StructuredRetailProducts.com.
'As dividend yields will be factored in to futures and option prices, structured product providers will be able to counter the loss of yield to the investor by offering higher protection levels or more participation in the market, for example,' he said.
The vast majority of structured products link to capital-only indices as it is expensive to factor in future dividends, as well as being difficult to achieve while maintaining transparency.
Benson added that in the past, a few products used the German Dax index, which includes dividend income and capital growth, as a proxy for the European market but most now use the Eurostoxx, a capital-only index like the FTSE 100 and S&P 500.
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