Investments  

Apollo speaks up for structured products

Apollo multi-manager Steve Brann has spoken out for structured products, saying the controversial investments are starting to come good for investors.

The manager said he made structured product investments within his funds in 2010 and 2011 and after standing by the holdings for the past two years he is starting to reap the rewards.

Structured products have suffered reputational blows in recent years, chiefly after several products which were backed by Lehman Brothers collapsed when the investment bank went bust in 2008.

Since then the FSA, which started investigating the products, has clamped down on the way are marketed and experts have warned over their complicated derivative-based structuring.

But Apollo’s Mr Brann has said that patience is key in structured product investing, in the group’s latest Apollo Archer blog. “If you listen to some of the best fund managers in the industry they still invest for the long term and have conviction in their calls and unless the fundamentals change will back their conviction even if the market disagrees in the short term,” he said.

The manager cited the example of a structured note the team created with Credit Suisse in March 2011, aimed at benefiting from the developed world re-flation trend while avoiding “fully priced” index-linked government bond markets.

The holding represented 8.61 per cent of the £41.6m Apollo Multi Asset Cautious fund at end-January – its single biggest holding. The six-year note pays out income equivalent to retail prices index inflation plus 2.75 per cent a year provided markets do not fall by 70 per cent.

“In August 2011, due to the nature of the market fall and steep rises in volatility this note was more volatile than we would have liked,” he said.

“However we had long-term conviction in this trade. It has taken a little time but this note has now outperformed gilts, the corporate bond sector and the high yield sector. On February 13 we decided to take profits.”

The team structured another note with Société Générale in 2010, offering exposure to equities but with a degree of protection in the event of market falls.

“Although we wanted to increase our equity exposure we were not super bullish, so it was felt that a structured product would be the best route to access,” Mr Brann said.

The note accrues a 22 per cent coupon each year. However, it only ‘kicks out’ returns if all of four key indices reflecting US, UK, Japanese and eurozone equities are above their starting levels at any particular anniversary of the note’s launch.

Mr Brann said the note narrowly missed a ‘kick out’ on its first anniversary in May 2011 after the Japanese earthquake sent Japanese equities below their initial level – falls that would have hit the Apollo team if it had simply bought equities.

Then a eurozone issue caused the note to miss its ‘kick out’ last year, meaning that it now looks set to pay out a 66 per cent return this May provided markets remain at their high levels.