How structured products beat funds, bonds and cash

The FVC Structured Edge research service for IFAs covers the whole of the UK structured product market. It has been running since 1999 and has covered over 5000 individual products in that time.

Introducing our study

We recently analysed products on our database that have matured over the last three years and compared them to some popular alternatives that financial advisers often recommend to their clients.

The current investment climate is challenging and unpredictable despite some gains over recent years. We speak to many financial advisers and know that they face a difficult job in selecting compelling opportunities to their clients. The investment marketplace is very crowded today and regulations have increased significantly in the last few years with RDR, PRIIPs, MiFiD II and PROD all coming on board. Meanwhile, investors seem to become ever more demanding.

We believe that structured products deserve a wider audience and we have seen the efforts and progress that product providers have put into explaining the investment propositions, how the market works, and the benefits of the products they offer.

At FVC we are developing major new tools and services which will we believe take some of the research and administration burden away from advisers because we understand the pressures that all in the financial service industry are under to best serve their clients.

Analysing recent structured product performance

Our database contains all products covered by our UK research service which covers the whole retail market. We analysed products maturing in the three year period from 1 January 2016 to 31 December 2018, during which time there were a total of 927 index based investment products (those linked to the FTSE-100 and other mainstream indices) maturing. These break down into 730 capital at risk and 197 capital protected products which serve the two parts of the market divided by the most fundamental investor choice - whether an investor is prepared to risk any loss of capital.

None of the 927 structured products returned losses, and the average return was 7.45% p.a. for capital at risk products and 4.26% p.a. for capital protected products. The average over the entire set of products was 6.77% p.a..

These figures are remarkable and show how robust and reliable the market has been. It would be almost impossible to find any sector in any cycle from the fund world where every one of 900 funds over a three year horizon would not have a single fund losing money.

Equity markets were broadly positive during this period but the typical capital protection feature of barriers set at 50% or 60% of the initial level were instrumental in preventing losses in many cases. The ability to set protection in this way to reduce risk is one of the most important features of structured products.

Because structured products are aimed at lower risk investors the most emphasis is placed on providing investment returns that reach investor's targets along with protection that avoids capital losses wherever possible.

Comparison with other asset classes

In analysing any asset class it is important to consider how other investments have performed over the same time period.

The simplest verifiable comparison is to consider the point to point performance of funds and other investments since this is how such investments are normally measured. By comparison, structured products are best measured by maturity performances. The best comparison to three years of structured product return is to consider five years of point to point data in funds, since this captures approximately the same time period over which the set of structured products were open.

During the last five years a typical FTSE-100 ETF (we selected the iShares ETF) returned 5.44% per annum. One of the largest Absolute Return funds, the Standard Life GARS with 10 billion GBP AUM, could only manage 0.21% p.a..

From the fixed income world we selected a typical corporate bond fund - one run by Aviva which achieved 3.60% p.a.. This would be a natural comparison to capital protected structured products although bond funds do not have any guarantee of capital preservation over a given horizon. Finally we note that deposit accounts, the easy choice still used by many investors typically earned 0.5%-1.5% p.a..

All structured product performances are net returns to the investor of all typical charges. The ETF and fund performances are bid to bid and may incur further charges on top.

For those investors seeking equity like returns at controlled risk it is clear that over this time period structured products actually outpaced the equity market and clearly outperformed one of the most well known funds in the recently popular absolute return fund sector.

Supported by moderate equity returns, the capital protected portion of the market, usually issued in a deposit wrapper with recourse to the FSCS in the event of issuer default easily beat cash returns and also outperformed corporate bond funds a sector normally popular for those looking for higher yield at controlled risk.

I believe that there is much food for thought here and these results speak for themselves.

Performance tables

Figure 1: Capital at-risk comparison

Sector / Fund Annualised return
   
UK capital at risk structured products 7.45%
IShares FTSE-100 ETF 5.44%
Standard Life GARS 0.21%

Figure 2: Capital protected comparison

Sector / Fund Annualised return
   
UK capital protected structured products 4.26%
Aviva Corporate Bond fund 3.6%
Average savings rates 0.50%-1.50%

Source: www.structurededge.co.uk

Structured product maturities 1/1/2016-31/12/2018. Funds data 1/1/2014-31/12/2018. All structured product returns are net returns to the investor. ETF and fund performances are mid to mid and may incur further charges.


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