To say structured products should be avoided in their entirety shows naivety and lack of understanding

To say structured products should be avoided in their entirety shows naivety and lack of understanding

14 June 2010 / by Rachel Mason

In response to some recent bad press about structured products, Julie Smith, head of structured products research at Fair Investment Company explains why you cannot judge all structured products as 'complex' and 'costly' in one sweeping statement:

"Not all structured products are complex.  Some are and some aren’t, but can’t this be said for any type of investment?

Capital protected structured products are generally more simplistic than capital at risk; a good example of a straightforward capital protected product would be a five year plan linked to the performance of the FTSE 100 providing a fixed return and your capital back if at maturity the Index is the same as or higher than its starting level.

Capital protected products prove popular with those who do not want the risks associated with investing directly into equities but want returns higher than those available from cash - of all the structured products launched in 2009, 679 products (out of 1,087) representing £11.4bn (out of £13.9bn) were fully capital protected.*

Across the board it is essential to understand the inherent risk with any type of investment; and with structures, whether its capital protected or capital at risk, one of the first things to look at is who is backing the plan i.e., the counterparty.

Knowing the financial strength of any counterparty is one way of assessing the risk of default; the higher the financial strength of the counterparty, (in the main) the less chance of default. Some providers are even offering their products with a choice of counterparty to give that extra choice for this very reason.

It is also not fair to say that structured products on the whole are costly. In current market conditions there are plenty of people that would willingly give up some of the upside returns for a level of protection from falling markets. As for the actual costs involved with structures, these couldn’t be more transparent.  As the costs are built into the terms on offer at outset, it makes it much easier for a client to understand the potential returns on offer, without the need to consider the impact on their original investment from ongoing costs.

To say that those people looking for returns above cash shouldn’t consider structures in their entirety shows naivety and lack of understanding.  And to suggest ISAs as an alternative to structured products makes no sense. ISAs are a tax efficient wrapper, and there are many different types of investment products that can be held in an ISA, including structured products. You cannot suggest a tax efficient wrapper as an alternative to an investment product, it is not comparing like for like.

Everyone is entitled to their opinion and it goes without saying that structures are not for everyone; however, the actual danger here is that a balanced argument is not being given and the focus is primarily on the risks associated with some products and not all." 

Compare structured investment products or read Julie’s articles on structured products in our magazine, Investment Direct.

Below are the best ten annualised returns offered by structured products that have come to maturity so far in 2010. All of them offered returns of up to 15% p.a. over their investment period.*

*Source: http://www.srpadviser.com


Issuer Name

Product name

Initial Strike

Expiry Date

Annualised Performance (%p.a.)

Investec

FTSE100 Enhanced Kick Out Plan 1

09/03/09

09/03/10

15.0

Investec

FTSE100 Enhanced Kick Out Plan 2

05/05/09

05/05/10

15.0

NDFA

Growth Kick Out Plan December 08

20/02/09

22/02/10

14.9

BNP Paribas

FTSE Annually Autocallable Series 25 Preference Shares

21/04/09

07/04/10

14.7

Meteor Asset Management

Prima Growth Plan 11

06/02/09

08/02/10

13.9

BNP Paribas

FTSE Annually Autocallable Series 18 Preference Shares

20/02/09

22/02/10

13.9

Meteor Asset Management

Prima Growth Plan 12

06/03/09

08/03/10

13.9

Barclays Wealth

Defined Returns Plan - December Edition (Annual Kick-Out)

17/02/09

17/02/10

13.5

AXA Isle of Man

AXA Isle of Man Barclays Defined Returns (Annual Kick-Out) Mirror Fund December 2008

17/02/09

17/02/10

13.5

Barclays Stockbrokers

FTSE100 Defined Returns Investment Note

17/02/09

18/02/10

13.5