Last August I wrote a blog on these pages about a Keydata plan which provided the biggest shock since the eponymous scandal first emerged. Keydata Dynamic Growth Plan 18 matured in July, having run through the entire financial crisis, and delivered a 72 per cent return.
To put it simply: it did exactly what it was supposed to do. The plan offered a return of 12 times the rise in the FTSE 100 index over the six-year term, with investors only losing money if the index plummeted by more than 50 per cent without regaining its ground, which it did not.
It was not an aberration. Another of the suite of ‘vanilla’ products that was sold alongside the plans based on Luxembourg ‘death bonds’ matured in January of this year and provided a return of 80 per cent, according to latest payout data from StructuredProductReview.
Again, the plan had ‘soft protection’ which meant it would deliver its promised 10 per cent return per year, subject to an 80 per cent ceiling, as long as the FTSE 100 did not drop more than 50 per cent from the starting level, or counterparty JPMorgan did not fail.
Despite some run-ins with the regulators requiring it to part with reparations worth billions of dollars, JPMorgan survived the crisis; the FTSE did not drop to its 1997 low of 2,934.5. Investors - and their advisers - have been rewarded with a stellar return.
What to make of all this?
Well, firstly - and as I said previously - these cases prove the folly of generalising. While ombudsman verdicts and the like may suggest otherwise, not every Keydata recommendation was negligent or ill-suited. Similarly, not all structured products are ‘precipice bonds' or high-risk, esoteric investments only suited to sophisticated investors with a penchant for dice-rolling.
Second, elucidating this latter point structured products must be viewed on their individual merits.
Going back to the StructureProductReview data, a number of plans matured in January and generated impressive returns, similarly several matured having done not an awful lot.
For example, one product, the Dawnay Day Quantum Protected Commodities Dynamo II that was linked to a basket of commodities, produced a 10 per cent loss over 5.5 years. Another, the Abbey Capital Guaranteed Residential Property Bond (Issue 2), was one of three products to return only the initial investment - and thus a real terms loss - and that after a seven and a half-year term.
Crucially, even these products did what they said they would. The Dawnay product suffered the maximum loss possible without the counterparty failing, which was disclosed under the terms of the plan.
Unlike active managed funds which pledge target returns and risks, with structured products the returns and associated risks are all known at the outset. If the index does one thing or another investors will get back a particular amount of their investment plus a set return, if applicable.
They will usually not get any dividends from the underlying securities - they are invested in derivatives rather than directly in shares - and if the counterparty (or, as is increasingly the case, counterparties) fails they will get nothing. Where the products are Ucits III compliant, even in these latter cases there is collateral that might protect the original investment.
The point is, not all of them will provide a positive return, most will struggle compared to equity alternatives providing regular income and some will even provide a real terms loss. But for a particular client the protections available, if the risks are understood, can be a useful portfolio tool, with the potential returns a tasty cherry on the top.
So don’t write the whole sector off - these two plans prove even assuming the word Keydata being associated with a product is a guarantee of poor outcomes would be folly.
