Simplicity is often a virtue

WITH markets still directionless and a second-half slowdown looming, those with savings are increasingly looking into more exotic ways to preserve their nest-egg. The desire for safety combined with sinking government bond yields has fed demand for a series of structured products for private investors – that is, investment vehicles that promise a defined return by tracking an index and protecting against loss of capital.

But although the retail structured products marking is growing, the complexity of these tools can often disguise quite average returns. According to savers sunk nearly £14bn into this asset class last year, up from £5.6bn in 2005. And with 45 per cent of these volumes sold through independent financial advisors (IFA), it is worth researching the market so that you can ask your IFA the right questions – not least, whether she is receiving a commission for getting you to buy the product.

As with investment products designed for professional investors, structured products for private savers come in a variety of forms. But unlike those made for the professional market, these retail products tend to focus on the safe return of capital rather than on liquidity and exotic or inaccessible investment classes. Morgan Stanley’s Sophie Barnett says: “The current environment is very conducive to structured products: investors are earning little on cash savings and there’s a lot of uncertainty.”

One kind of product that has proved particularly popular in recent months is known as an “autocallable” – or, in layman’s terms, a “kick out plan”. Under the intimidatingly labelled “FTSE 100 Kick-Out Deposit Plan 15”, offered by Investec through participating IFAs, even just understanding the options available can lead to fairly complex cost-benefit calculations. Under one of the options, the plan “kicks out” (i.e. matures) on a certain date provided the FTSE 100 is above the initial starting level it was at when you bought the plan. This “kick out” means that investors received 5.25 per cent non-compounded interest on their capital for each year the plan has been running before its maturity – up to its maximum running time of five years.

If you think the FTSE is likely to go up over the next five years, this might seem like a good investment. But there is more than one catch. If the FTSE has a bad week on the relevant date during the year of maturity, you simply receive your capital back, with no interest, unadjusted for inflation. And all the dividends from the investment go to the provider. So if investors really think the FTSE will go up, why not buy shares directly and receive the dividend payments?


Still, although a wide range of such products offer little better returns than high-dividend
yielding stocks or a good corporate bond, a savvy investor might chance upon an
occasional good deal. The key is to understand the fine print, be sure to ask your IFA if they are receiving a commission (many will pass the fee they make onto you instead of adding to your costs), and be aware that such products always expose you to counterparty risk – the risk of the product provider going bust. Once these risks are fully understood, it might be worth using a product as part of an overall investment strategy to, for example, smooth out volatility in the value of one’s portfolio. Ian Lowes of the IFA site says: “We like the fact that it’s a defined return based on a defined underlying measurement payable at a defined date with defined risks.”

Even so, investors should be aware that the deal they are buying includes a fee taken by the provider. In weighing the benefits, therefore, BestInvest’s Adrian Lowcock advises: “Look at what you’re paying for in that fee, compare it against the protection you’re getting on downside and the upside potential. Then, with a FTSE product, take the FTSE as a benchmark and factor in its annual dividend plus its expected growth over the lifetime of the product.” Only then is it possible to work out if you are being sold a good deal, or an unnecessarily complicated way of buying the FTSE.