Choose structured products for security

Buy-and-hold investors have had a miserable time so far in 2016. The FTSE 100 index lost more than 9 per cent between 25 January and 11 February alone, while a spate of ferocious selling in mid February drove global indices to the cusp of bear market territory, down 20 per cent from their one-year peaks.

It's at just such fearful times that we're exhorted to follow the advice of Warren Buffett and be greedy - and there are undoubtedly bargains to be had out there.

Shares in Neil Woodford's Patient Capital Trust, for example, have fallen in value by 26 per cent since last August, and their premium to net asset value has narrowed from around 15 per cent to just 1.5 per cent, which some might consider a buying opportunity.

Find out more about structured products with our structured product spotlight series.


But other investors are fearful of misplaced greed. Not knowing how long this bear market might run, or whether we have reached anything like the bottom of it, they don't have the stomach, or else the time horizon, for further investment and more potential losses.

The perennial optimist Ken Fisher has stern words for such lily-livered creatures.

Yet what's the alternative to market exposure? There's no joy in holding cash if you want a real return from your money.

We're seven years on from the introduction of rock-bottom interest rates, and upward movements are no longer even on the horizon; the Economist Intelligence Unit has extended its forecast for the first UK rate rise by three years, to 2020.

And meanwhile, rates across Isa, deposit and current accounts average just 0.9 per cent, according to Adrian Lowcock at Axa Wealth.

It was therefore interesting this week to hear from IFA Ian Lowes at Lowes Financial Management, who for many years has been banging the drum for structured products.

These fixed-term packaged investments come in a multitude of shapes and sizes, but in a nutshell they are designed to pay out a certain return, provided a particular index achieves a pre-determined target.


I have always been pretty sceptical about structured products, not least because I find the literature jargon-ridden and impenetrable.

But they have also been widely criticised over the years for their complexity and opacity, and for the fact that their security is dependent upon a counterparty bank (Lehman Brothers was one of the biggest players) to underwrite the derivatives that make the whole clever product work.

However, according to Lowes, who also runs the comparison website, every single one of the 347 IFA-distributed structured products linked to the FTSE 100 index that matured in 2015 delivered positive returns.

On average, investors saw annualised gains of 6.6 per cent over a term of just over four years, but the average return from the top-performing 25 per cent of products was 9.5 per cent a year. Even the bottom quartile pulled off almost 4.3 per cent a year.

Not bad, given that the FTSE 100 index lost almost 5 per cent in 2015; over the same four-year timeframe it returned less than 4 per cent a year on average, or 8 per cent a year with dividends included.

Structured investment products don't guarantee the safety of your capital; if markets are unfavourable, you may get back only what you put in, but you are unlikely to lose money, says Lowes.


In part that's because of the 'kick-out' design of many of them, which means that if the index target is met on the first potential maturity date, the investment winds up and pays out, but if the target is missed, it rolls on another year, and so on up to the full term, typically six years - giving investors several bites at the payout cherry.

Lowes' firm has designed its own structured product that takes this a step further, by introducing a 10-year possible term. The 10:10 Plan has three options with different risk levels (and corresponding returns).

The medium-risk option, for example, will pay out 9 per cent a year if the FTSE 100 index is at or above its start level after three years (ie paying 27 per cent in total); if the index is below where it was when the plan started, it will roll on for another year, and so on, gaining a potential 9 per cent each year.

If the investment runs to year 10 and the index is still below its starting level, but less than 30 per cent below, investors get their capital back. They do not lose any capital unless the FTSE 100 is more than 30 per cent lower.

Interestingly, if you look at the FTSE 100 since its inception in 1984 and back-test the Lowes product against it, only if the plan had been started around the peak of the dotcom boom in 1998/99 would it have failed to pay out after 10 years.

There is no disputing the fact that these products are hideously complicated, and for that reason they should be bought through a financial adviser who actually understands them.

Nonetheless, as an alternative for more cautious investors prepared to sacrifice some potential market returns for greater security, they could be a useful addition to a portfolio.

But remember, they are still basically a market gamble. In the case of the Lowes 10:10 Plan, the risk is that you invest at the high point of a bear run lasting for the next 10 years. It's a scenario that may not be likely, but it's possible.

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