Many of the products highlighted in the press have been designed and sold by banks to their own customers and by definition these are not products promoted by interdependent advisers.
Read behind the headlines
National papers covering structured products will often say they are responding to readers’ letters (how many we never know) saying they didn’t understand the products and so were gravely disappointed by the results produced.
The danger is that commentary around the subject does not distinguish between the products and how they were sold.
A recent article mentioned that in February 2012 Santander had been fined by the FCA for failing to make clear whether or not certain of its products were covered by the Financial Services Compensation Scheme (FSCS), and likewise other articles have mentioned fines for Lloyds and Credit Suisse in recent years for the way they have sold and marketed products.
But that’s the selling process of individual distributors. The individual products will have delivered what they said they would – it is whether those products were right for the people investing in them, whether the nature and probabilities of the investment were spelt out in sufficient detail and, importantly, whether the products were good value and used as part of a balanced portfolio of investments.
Back from the brink
Hindsight is, as we know, a wonderful thing and it can sometimes be unhelpful to examine ‘what if’ scenarios that compare the ‘actual’ investment returns with those that could have been achieved over the same time period in another investment. Until we have the opportunity to reflect at the end of the investment period we do not know, for example, whether in five years’ time a tracker fund would have given us a greater return than an actively-managed fund, a structured product or any other investment type.
In a previous article for Portfolio Adviser I highlighted the performance of the Keydata Dynamic Growth Plan 18, which delivered 12 times the rise in the FTSE 100, equating to a 72% return on the 6.3% rise in the index over the six-year term of the investment.
Similarly, another recent maturity, the NDFA Capital Secure Fixed Growth Plan July 08 that struck in September 2008, delivered a 50% return on capital after five years against an index that had risen 28%.
These are companies that advisers will recognise as having gone to the wall back in 2009 and yet these structured products have delivered what they said they would. What is more, over the period of the investment they have significantly outperformed the index and produced better returns than the tracker funds that may be seen as the nearest equivalent investment.
Capital protection+
If we consider the actual returns generated by IFA-distributed structured products over the past few years, specifically ‘capital-at-risk’ structured products linked to the FTSE 100 maturing over the past five years, they have delivered an average annualised performance of nearly 8%.
If we take the first quartile of those same capital-at-risk structured products, the average annualised return was over 12% and given that the average bottom quartile performance is still positive and these returns were produced while protecting capital from all but the most extreme events, IFA distributed structured products have certainly delivered.
Some structured investments have lost investors money, for example, those bought in 2007 with the Nikkei 250 or Eurostoxx 50 as the underlying; as more than likely have many of the mutual funds that have chased the numerous ‘new dawns’ predicted for the Japanese or European markets over the years.
What is frustrating for financial advisers is that often in articles, because there is no distinction made between the products and how they have been sold, all structured products get tarred with the same brush – which is grossly inaccurate and misleading for investors.
Ride the positive wave
I would contend that very few, if any, investors would complain about the returns delivered in the two products above, despite the negative associations with those provider names, nor to have ‘just’ received their capital back if the market had fallen before the products matured, in all probability taking their other investments without capital protection down with it.
In fact, a capital protected product returning cash when markets have fallen gives the investor the opportunity to buy into a depressed market and, hopefully, ride any uplift that occurs as the market recovers.
There are plenty of good structured products in the market that are easy to explain and that can be clearly understood by clients. Investment is about taking risk with capital and structured products can play their role in mitigating some of that risk while delivering the returns they say they will when they say they will.
The growing number of professional advisers researching and investing in structured products reflects the value that they see in the investments and it is to be hoped that, sooner rather than later, that will be reflected in constructive and positive news stories as well.
