While at the time we had not concluded that the failure of a major counterparty was likely, we felt that it was prudent to stop investing new money with counterparties who had a Standard and Poor’s credit rating of anything less than AA-.
Move back to banks
This decision, which took place following ‘Bear Stearns Monday’ meant that we instructed a significant number of clients to submit cancellation notices for a Lehman Brothers-backed plan, which subsequently proved to be somewhat prudent. Throughout 2009 we held our position meaning that we were not prepared to risk further exposure to banks such as RBS, Morgan Stanley and Citi.
In early 2010, however, following a review, we felt that the terms offered by Morgan Stanley represented appropriate potential reward for the risks and as such we moderated our stance, identifying certain Morgan Stanley plans as worthy of consideration for investment as part of a diversified portfolio.
One of these was the Morgan Stanley FTSE Kick Out Growth Plan, which I invested in myself. The investment offered 120% of the rise in the FTSE over a six-year period, no loss unless Morgan Stanley defaulted or the FTSE fell by more than 50% over the term. These terms were not sufficiently attractive on their own but the added kick-out made all the difference. This offered a 50% gain at the end of three years if the FTSE had risen by more than 15%.
Now I appreciate that to some who may be trading individual stocks and adopting high risk strategies, a 50% gain over three years may not sound too attractive but for those like myself who adopt less risky strategies and use collective investments it was somewhat more appealing.
Our view at the time was that while we expected markets to recover over the following three years, we did not expect that our portfolios of collective investments would generate gains of 50%.
Clear definition
As it was, the decision turned out to be correct and the Morgan Stanley plan matured recently generating the 50% gain – significantly more than the FTSE and most collective investments over the same period.
Morgan Stanley has released a similar plan which offers the potential of a 43% gain at the end of three, four, five or six years if the FTSE is 5% higher and I am seriously considering taking my gains and reinvesting my original capital into that option.
Rather than considering such investments as the be-all-and-end-all we consider them as a compliment to collective investments. Instead of adding to an existing or new fund in my portfolio, I opted for the Morgan Stanley plan and am very pleased I did.
Not every structured product produces such impressive results any more than every fund performs well but the returns from the structured product element of my portfolio has, in the main, been more impressive than the vast majority of my collectives but without the same risks.
Structured products offer defined returns in defined circumstances, delivered at defined dates and as such are, in my opinion, much more appealing and palatable to invest in than many other alternatives where the performance is much less predictable.
From an adviser perspective, having used structures for many years, I know that many clients feel the same and in the main structured products certainly help to maintain the client/adviser relationship.
