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With turmoil raging in the investment banking world, the IMA has provoked another storm among structured product providers. The IMA warned investors recently about structured products offering a return linked to both the growth of a stock market and a guarantee against capital loss. “Many of these claims should not be taken at face value,” the association said.

Dick Saunders, chief executive of the IMA, said many investors were unaware of “the quantum of sacrifice” most products involved. “None of the literature that I’ve seen comes remotely closely to explaining it,” he added.

Unsurprisingly, the IMA’s comments met with a wail of disapproval from structured product providers. Most argued the association’s use of National Savings & Investment’s five guaranteed equity bonds (GEBs) to illustrate its point, misconstrued the nature – and range – of structured products available.

“It is completely simplistic to make a sweeping statement about the whole industry,” responded Chris Taylor, chief executive of Blue Sky Asset Management. “Yes, it is true that a plain vanilla structured product delivers its capital protection by swapping the dividend stream for the protection, but it is not hidden – it’s explicitly expressed in the brochure. There are plenty of mediocre structured products, but that doesn’t equate to the wider range of intelligent investment choices available.”

According to the IMA’s statistics the five NS&I GEBs – an example of “uncapped call” products that account for 54 per cent of the UK structured product market – are underperforming the stock market by approximately 4.5 per cent a year. “This is very close to many economists’ estimates of the current ‘equity risk premium’,” Mr Saunders explained. “In other words, the returns from these GEBs can be expected over time to be much closer to risk-free investments such as cash deposits and gilts than to the stock market.”

More and more investors are choosing to move into structured products. Robert Bell, joint director of London & Capital’s structured product division, estimates that retail structured product sales for 2008 could reach as high as £10bn, up from an estimated £6-7bn the year before. “The volumes show investors are not being scared away from these types of products,” he added.

Mr Bell’s point is simple: investors are opting for structured products in these turbulent times for “peace of mind”.

“The single most important thing for investors in times like this is the fact they’re getting capital protection,” he said.

Mr Taylor agreed. “Just because the five-year returns show that protection wasn’t needed doesn’t mean the IMA should suggest it was worthless. Consumers don’t look back on home or car insurance and say it was worthless because they didn’t crash or get burgled. Insurance has a cost because it has a value, and this is especially so in the minds of investors, and in the absence of true risk control from traditional funds.”

The IMA’s other point is that at present structured products and traditional mutual funds are not competing on a level playing field. “I’m not saying all structured products are bad,” Mr Saunders said. “But I think one does need to look quite carefully at the extent to which there is a level regulatory playing field surrounding them. The lighter touch regulatory environment that many structured products have does mean it is easier to bring structured products to market.

“Structured product providers are quite upfront about saying they are taking business off mutual fund providers. But if they are competing then it has to be on a level playing field.”

Yet the new regulations brought in by Mifid have addressed many of these concerns, responded London & Capital’s

Mr Bell. “Now, the marketing products are far more scrutinised than when they were launched, and investors are also now getting a good level of reporting.”

Investors have moved to place more of their assets – and their faith – in structured products because their risk appetite has declined, he pointed out. “Investors are starting to think more about risk-adjusted returns so are switching to products that give them more transparency about what they are investing in over a certain period.

“People’s risk appetites move according to what is happening in the markets – and following the news about Lehman Brothers and Merrill Lynch it is likely that they will now be even lower.”

Hugo Greenhalgh is editor of Investment Adviser