The obvious place to begin this blog is with the collapse of Lehman Brothers. Leaving aside the wider ramifications - I am not in a position to discuss those - the fall of Lehmans has done two things.
One, it has left many investors potentially nursing large capital losses and, two, it has highlighted - in the worst possible way - the dangers of counterparty risk.
The IMA, whose statement prior to Lehman's collapse now seems particularly prescient, has won plaudits for flagging the latter issue, and no doubt it had a valid point with respect to transparency: providers have, on the whole, failed dismally to tackle accusations of opacity.
Clearly, the widely accepted practice of simply stating “assets provided by an issuer rated A by Standard and Poors” in marketing literature has to stop now. (We have been disclosing our underwriter - Barclays, thankfully - for two years now and I am frankly at a loss to explain why others did not think it would be helpful and informative to do likewise.)
Lehman's collapse has also highlighted the need for improved transparency in relation to culpability. If investors put money in a product promoted by one party, administered by another - neither of which is the counter party – to whose financial strength do they look to assess the security? As things currently stand, that is not at all clear.
Transparency aside, the IMA's other arguments are very much open to question (although its intervention did serve to highlight an increasingly relevant and justifiable comparison: that between 'conventional' funds and structured investments with capital protection).
The IMA, rather unwisely in my view, made a specious comparison to illustrate its point on performance, which undermined the main plank of its argument. The highly selective timescale it used - the bull market since 2003 - told you nothing: you would expect an index tracker to outperform in those conditions.
The fact is that investors buy structured products for a host of reasons, not least the capital protection they provide. A rudimentary performance comparison ignores investors' appetite for risk, when the point is surely to balance risk exposure against reward to find the right solution.
The other major area the IMA chose not to address is the thorny issue of investment timing.
Crude performance statistics are all well and good from a marketing perspective, but investors' actual returns rarely reflect the raw numbers so loudly trumpeted by fund groups on posters and client literature.
Investors simply do not invest at the right time - as evidenced by the high correlation between market levels and net sales - which means they fail to capture much of a fund's performance.
Structured products make market timing much less of an issue and provide far more consistency and predictability than their unprotected counterparts. Past performance can only tell you so much: no meaningful conclusions can be drawn from the performance of an index tracker - or any other fund - over the last five years, when there are bound to be very different conditions going forward.
The problem the IMA faces is that structured products are hoovering up much of the business that would traditionally flow into its members' funds. But with so many funds underperforming, investors are understandably reluctant to plough their money into the market without a degree of protection and certainty.
The IMA is largely powerless to stop this, and has simply attempted to slam the competition in the only way it thought it could. As mentioned earlier, I agree with some of its points on transparency - we as an industry undoubtedly need to improve on this front, with institutions being much clearer on the risks involved (and stricter about the financial strength of the institutions backing the products) - but otherwise the IMA has, in my mind, failed in its efforts to knock structured products off their pedestal.
Colin Dickie is director at Barclays Wealth
The views expressed in this article are those of its author and do not necessarily represent those of the company he represents, IFAonline or any other Incisive Media affiliated organisation.IFAonline
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