Friday Highlight  

The value of structured products in uncertain times

This is important as the returns are a contract between the investor and issuer who, subject to their solvency, must deliver the returns if pre-defined conditions are met. 

Those pre-defined conditions, in the example of a FTSE 100 Autocall, like the one described above, are transparent and determined from the outset - the only decision for investors is whether they are happy with the risk and return profile.

Risk

Regulatory risk is something that needs to be taken into consideration as well. 

The FCA voiced concerns about all investments which can be allocated incorrectly, mis-understood or have returns over-stated and structured products have been no exception. 

This has fed through to higher PI premiums if you advise clients on structured products. However, the FCA thematic review in 2015 addressed many legacy issues and set robust guidelines for manufacturers and distributors in areas such as;

  • Identifying a clear target market and using this information to inform the product development and distribution strategies
  • Ensuring structured products have a reasonable prospect of delivering economic value to customers within the target market
  • Strong monitoring of products and applying effective product governance ensuring customers are treated fairly

The FCA Thematic Review of structured products was arguably ahead of its time, with recent regulatory initiatives such as Mifid II and Priips catching the rest of the investment universe up. 

Advisers who demonstrate a robust governance and investment process advising on structured products have successfully reduced their PI premiums and have truly demonstrated their independence by including these products.

Pension Freedom changes in April 2015 still represent one of the biggest opportunities for the structured product universe as it gives greater freedom in how you can access your pensions. 

While many of the popular strategies such as absolute return, low volatility and multi-asset funds have their pros and cons, an often overlooked part of the market is structured investments.

The defined return and defined risk profile of many of these investments lend themselves well to clients that are looking for market-linked returns, income or a combination of both.

Diversification

Pension freedoms have also placed a responsibility on investors and their advisers to manage sequencing risk and pound-cost ravaging in the short-term and inflation risk in the long-term to ensure they are able to maintain a standard of living in retirement. 

Arguably, all individuals now have the potential to be their own mini-pension fund manager having to deal with meeting their future liabilities with a given set of assets and managing longevity risks, among others.

With 10 year gilt yields just under 0.6 per cent pa at the time of writing, the favoured investment for traditional pension fund managers to match their liabilities with, i.e. gilts or other Fixed Income securities are severely curtailed.

With rates across the globe cut in emergency meetings a popular 1980s saying applies here... TINA (there is no alternative) to equities. 

However, equities are a risk asset class and, with higher volatility, have the potential to generate plus (or as we have seen over the last couple of weeks, minus) 30 per cent returns in any given year.