How structured products can perform in a shaky economy

Research from Structured Product Review, found that of the 381 retail structured products that matured in 2018, none of them created a loss for investors.

Furthermore, 94 per cent of these maturities generated positive returns, with the average products achieving 6.33 per cent a year.

The average annual return for the those in the top quartile was 9.25 per cent.

Positive performance?

The performance data over longer periods adds further weight behind the argument. Average annual returns of 6.77 per cent and 6.23 per cent, over three and 10 years, respectively, are equally impressive.

Structured products, however, can add value in portfolios in ways that neither active nor passive funds can--Chris Taylor

Also, as was the case with performance over one year, no maturing structured product created a loss for investors over three years.

It is important to point out, however, that anyone invested in markets is likely to have witnessed stellar returns at most periods over the past 10 years, with the average equity fund far outstripping those mentioned above.

However, apples should be compared with apples, and so perhaps a more worthy comparison could be made with the absolute return fund sector, which has mustered an average annual return of 4.4 per cent, according to data from Financial Express.

On this basis, it is hard to argue structured products fail to warrant consideration.

Ian Lowes, managing director at Lowes Financial Management says: “We’ve all heard the adage that we should be looking at ‘time in the markets’, rather than ‘timing the markets’, so let’s assume we are looking at a buy-and-hold strategy. 

While I hesitate to forecast where markets will go from here, if the current conservative economic outlook leads to side-ways or range-bound equity markets, structured investments are likely to perform exceedingly well on a risk-adjusted basis over the medium term.--Nick Johal

"I’m sure we all expect markets to rise over the medium to long term but none of us can say when and we know it could be a bumpy ride. Now consider a simple FTSE 100 linked autocall product with a maximum duration of ten years.

"On the first anniversary that the FTSE 100 is higher than the position recorded at the beginning of the term, the investment will mature with a 10 per cent gain for each year it has been in force.

"So, if markets are positive, it will mature in the early years but if they take a downturn, recovering some years later, investors will be well rewarded for their time, in what ultimately proved to be a market that didn’t fare to well. Only in the extreme circumstances that the counterparty bank defaults or the FTSE 100 falls and doesn’t recover for 10 years, will the investment fare poorly.”

Nick Johal, director at Dura Capital makes the case for the inclusion of structured products within a portfolio, and explains they can be useful for a variety of different investors.

He says: “We recommend using our investment plans as part of a diversified portfolio. With low interest-rates and after a long equity bull market, investors may want to consider a more defensive equity investment which many of these plans can provide.

In addition, for those approaching retirement or already in drawdown, our investment plans can offer equity-like defined returns by foregoing dividends and uncapped equity upside, but potentially mitigating the sequencing risk of large falls in the equity market which can have a devastating effect on portfolios.”

He goes on to add: "Defined returns with defined risks should be appealing for most investors. After all, just under 7 per cent compounded over 10 years will double an investor’s portfolio and we feel these investments have a high probability of generating those returns.”

Economic outlook

The case for structured products could be further strengthened by the economic outlook.

As mentioned previously, many commentators and experts feel a continuation of the market returns achieved over the past decade is highly unlikely, and with the political and economic unrest caused by the likes of Brexit and the US/China trade war, many in fact anticipate that markets could head the other way, for a period at least.

Clearly, if global markets suffer similar drops to those seen in the aftermath of the 2008 global financial crisis, then a number of structured product investor may see their capital returned and nothing on top, and we could even see some losses.

However, investors expecting less severe market falls may see sense in using structured products within their portfolios.

The bottom line is that it’s most advisers' expectation that it’s going to be harder to make such strong returns for clients in the next 10 years as were enjoyed in the previous.--Chris Taylor

Mr Johal says: “While I hesitate to forecast where markets will go from here, if the current conservative economic outlook leads to side-ways or range-bound equity markets, structured investments are likely to perform exceedingly well on a risk-adjusted basis over the medium term.

Many commentators bemoan the fact that everything is currently expensive, so the potential to deliver returns of 6 per cent plus with a high degree of probability warrants attention.”

Mr Taylor echoes Mr Johal’s views.

He adds: “The bottom line is that it’s most advisers' expectation that it’s going to be harder to make such strong returns for clients in the next 10 years as were enjoyed in the previous.

"If markets become range bound/sideways moving , or even correct, alpha from active fund management may encounter a challenging period, while passive funds will of course follow the market and also be range bound/sideways moving.

"Structured products, however, can add value in portfolios in ways that neither active nor passive funds can; in particular, generating positive returns that do not depend on markets rising, or even if they fall, with defined protection if they fall.”