benefits of digital layer in structured portfolio

While all the caveats of past performance and unknown futures still apply, Ian Lowes gives specific examples of structured products that would help investors looking for a degree of certainty.

benefits of digital layer in structured portfolio


They are concerend that whenever they invest in the cycle they cannot be sure what they will receive when they need to extract their cash nor whether they might have lost money if markets crash at that point.

For those investing with set goals in a certain time frame – school fees, a lump sum for retirement, or a particular project, etc – investing in mutual funds could see their total cash significantly reduced if the markets fall.

Defensive digital structured investments provide a known pay-off  in defined market circumstances, delivered  at a defined point, and can both protect capital from all but the most extreme market conditions and deliver positive returns in falling markets.

There are three typical products issued in the past three years that I feel merit closer examination:

  • These are a defensive ‘digital’ growth product, which may, for example, have offered a 70% return on capital in six years as long as the FTSE 100 was not more than 15% below its initial index level.
  • There is then the defensive digital autocall examples that have the facility to mature early with a set upside on a reducing reference level, of for example 8% per annum with the investment maturing if the index level is 100% of the initial index on the first anniversary. If it is not at that level, it reduces by 10% on each subsequent anniversary – so 90%, 80%, 70%, 60% and 50% of the initial levels for years two, three, four, five and six respectively.
  • The third example is a variation on the above that has a set pay-off per annum of 8% payable on the first anniversary that the index is above its initial level. Notably if the index does not reach the required level on any anniversary, it pays out the full six years of accumulated returns as long as the index is not down by more than 50% at maturity.

The caveats are that if any relevant early maturity trigger is not met and the index/indices fall over the full term by more than the defined percentage level (in most cases 50% from the initial index level) the investor will lose capital at 1% loss for every 1% fall in the index, much as they would if invested in an index tracker which is 100% exposed to market downturns albeit without dividends or associated management costs. 

Also, the risk that the counterparty to the investment, always a major bank, could fail or default on its debts must be factored into the discussion with the investor.

Current pricing in the market means that most of the defensive digital products are taking the autocall format.

Good news from Barclays

For example, Barclays has a maximum six-year product paying 8% for each year held, payable on any anniversary from year three onwards, provided the FTSE 100 is not more than 10% below its initial level.

Morgan Stanley has a similar maximum six-year product paying 10% from year two onwards.  Meteor has a maximum six-year product paying 7.5% based on both the FTSE 100 and S&P 500 being no more than 10% below their initial levels at the relevant anniversary, payable from year two onwards, and if the indices are below the initial index levels all through the investment term, will pay a 45% gain if either of the indices has not fallen more than 40% as at the end of the term.

Walker Crips is currently offering two six-year autocall plans that I would like to highlight. The first is a reducing reference level product offering 8% a year, payable on the first anniversary on which the FTSE 100 is above its initial level. It offers a 48% gain at the end of the period if the index has stayed below the initial index at all previous five anniversaries (and therefore not matured early) and is no more than 50% below the initial level at maturity. 

The second is similar but offers a higher potential gain of 10% for each year held because it requires both the FTSE 100 and the S&P 500 to be higher on an anniversary and if not, at least not more than 50% lower at maturity.

The answer to the question, can you have your investment cake and eat it still remains no, certainly in current markets, but as long as you accept the size of the cake at the outset and acknowledge there is a trade-off between downside protection and upside reward, using structured products as one of the ingredients in your ‘cake’ can certainly help.

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