Using structured products within a Cash ISA

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We are living in challenging times. Global stock markets are volatile, there are unprecedented economic concerns in many regions of the world, and investors are faced with the conundrum of trying to generate a return on their savings while limiting the amount of risk they are taking.

This also applies when considering how best to use Individual Savings Account (ISA) allowances.

With interest rates low and the Libor curve for Sterling not pricing any interest rate rise until the end of 2013 at the earliest, Fernando Gasca believes that the positive signs we are starting to see in the global economy are making investment in the stock market a profitable option again.

As such, he believes there is another option that could well meet the needs of the more cautious investor, in the form of a structured product. “A Cash ISA is quite a conservative solution for people who want to take a conservative approach,” he says.

“However, advisers can also recommend structured products to more risk-averse investors as part of a balanced portfolio because they are held in the form of a deposit.”

It’s at this point that some advisers may feel anxious. Structured products have a reputation in some quarters – rightly or wrongly - for being aimed at sophisticated investors but Mr Gasca strongly believes hat they can be the right product for investors who want capital protection and the possibility of an upside return.

“When you talk about structured products you’re usually thinking more about investments but our solutions are structured deposits,” he explains. “This makes them very suitable for clients with conservative or balanced portfolios that would otherwise be investing in cash.”

It’s important to acknowledge the difference between a structured deposit and a structured investment. While the former are more suitable for those with more conservative ambitions, the latter are aimed at those willing to take more risk.

The capital return element of structured deposits is based on cash term deposits with a variable interest payment linked to the performance of an underlying asset, such as movements in a particular stock market.

Structured deposits are always capital protected at maturity and those on sale in the UK are covered by the Financial Services Compensation Scheme. Structured investments, on the other hand, more commonly have a corporate bond as the basis of their capital return and protection, and can be both capital protected or capital at risk.

The UK has a long-held tradition of long-only investing and this can make explaining the concept of structured solutions to clients more of a challenge. It’s one that only solid returns and lessons learned from various financial crises around the world, is likely to change.

“People had become used to seeing the stock market rise every year but when this started to change over recent years it’s made them think twice,” adds Mr Gasca. “As a result, advisers are often now focused on how important wealth preservation is to their clients.”

The Cater Allen products, therefore, should tick many boxes for advisers and their clients. The range is designed to provide a variety of capital protected structured deposits that take advantage of economic and market trends.

“Take for example our Annual Locked-In Return Plan 5 (ALIRP5) – as with a traditional Cash ISA, there is the comfort of knowing you’ll always have your initial investment back whatever happens, as well as the potential of being able to tap into any economic improvement if the FTSE 100 rises,” he explains.

“Every year the FTSE is at the same level or goes up you’ll receive 6.5 per cent which is a very good rate, and when you consider that the FTSE is still far away from its historical highs it’s also a very attractive entry point.”

From an adviser’s standpoint there’s likely to be lots of interest in these types of products from clients, especially if they have been burned by investments in the past. “After the economic downturns of the last decade, returns are no longer the overriding motivation and investors are increasingly looking for safety,” he says.

“This means that the appetite for other assets that could potentially carry more risk in exchange for the possibility of higher returns, has been – and continues to be - much lower.” This is probably for good reason, especially when you consider all the problems that global markets have endured over the past couple of decades.

“Since 2001 we’ve had the dot.com crash, the financial crisis and collapse of Lehman’s in 2008, and the eurozone crisis,” he says. “Right now investors want to be ready in case there is another market shock in the future so this more cautious approach allows investors to be prepared for any potential problems ahead.”

ALIRP5 has a six year product term and in effect, six years is a whole economic cycle but even though it will mature at that time, it’s also important to recognise the product has liquidity.

When you consider the resources and expertise available within Cater Allen, it is certainly worthy of consideration. As part of the Santander Group, the bank can draw on the strength and expertise of an international team to develop custom-made structured solutions which allow advisers to select a product based on their view of both financial markets and the overall outlook.

So what’s Mr Gasca’s view of the outlook? “The economy still has to improve before we can see sustainable rises but conditions are looking better than they have been for a while.” Of course he also points out that it’s important not to forget the potential global negatives that could adversely affect returns – and there’s certainly been no shortage of those over the last few years.

“The four main concerns are the eurozone crisis, the sustainability of China’s growth, the prospect of US growth continuing, and the outlook for emerging markets,” he says. “Although we think the outlook is positive, we can’t forget that capital preservation remains an important theme so we need to recognise there’s always the possibility of a downturn in markets.”

However, this shouldn’t detract from the arguments in favour of using structured deposits. “Our products are very transparent,” he adds. “They are for more risk-averse clients who want capital protection as well as the prospect of additional income at maturity.