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Free your mind: it’s time (and timely) to think carefully about the balance of investment management and how active fund management is objectively balanced with the use of quality Structured Products …….


‘‘I’m trying to free your mind, Neo. But I can only show you the door. You’re the one who has to walk through it. You have to let it all go. Fear, doubt, and disbelief.  Free your mind.’’: Morpheus, The Matrix, 1999.  This was futuristic in 1999, we are now considering the present …….

I recently had a thought-provoking chat with Chris Taylor, global head of structured products at new provider Tempo, about the fundamental differences between mutual funds and structured products, including the unique merits and efficacy of ‘best of breed’ structured products and their ability to add value within investor portfolios.

Chris has a background in asset management, including active and passive funds, and is one of the UK’s ‘go to’ experts in the structured products sector, so he has a good understanding of the full investment landscape. And it was hard to disagree with much of what he had to say. But, as he also said, it does seem to require some wealth managers and independent professional advisers, and investors, to ‘free their minds’ in order to engage objectively on the facts.

The fundamental fact that interested me was his explanation that active fund management is built around ‘aims and objectives’, that actually are simply ‘hopes?’, or even just ‘wishful thinking’.

The bottom line is that there are no obligations on fund managers to actually deliver anything that they ‘promise’.  They are measured in terms of performance against the relative benchmark but many ‘average’ funds aim to deliver benchmark type returns, often for compliance reasons.

If/when fund managers fail to achieve their stated aims and objectives, which is sometimes often, with average fund groups, (which explains the increase in the use of passive funds), they know that they can simply provide an explanation to investors, usually blaming their performance on markets, perhaps offer an apology (but rarely!), promise to try harder next time, and suggest that investors just need to be patient and remain invested (while the fund managers continue to take their annual management charges! Nice work, if you can get it!).  The recent FCA Asset Management Market Study and new rules make accountability clearer to investors.  The need for regular quality control of funds is greater than ever with reports like ‘spot the dog fund report’ highlighting good value and consumer outcomes, along with the poor value and outcomes.

The fact is that the risks of active fund management are borne by investors, not the fund managers. And it is this that is fundamentally different from structured products.

Structured products are based on contractual legal obligations. As with active fund management, investors in structured products access marketing materials, for example a plan brochure, detailing what the structured product has been designed to provide, and the conditions and parameters for both returns and risks. However, unlike active fund management, structured products marketing creates contractual, legal obligations upon the investment bank standing behind the product, as the issuer / counterparty, to deliver what they stated.  (It must be noted that the Headline rate of return is a ‘potential return’ as the ultimate results are based upon the performance of the relative index along with the issuer remaining solvent).

Structured products allow investors to abdicate from various risks that fund managers make them wear and tell them that they cannot avoid, including market risk and fund management process risk, delegating these risks to investment banks / counterparties, who must deliver the terms of the bonds that they issue that back their products, with no wriggle room, no explanations, and no apologies, unless they are bust (which is why the issuers’ financial strength is imperatively assessed at outset).

This is a significant USP benefit of structured products, that can serve investors well, in diversified and balanced portfolios.

The paper issuer prompts professional advises and investors to think objectively about the merits and efficacy of structured products, and their potential to add value within investor portfolios.

This is a compelling and unique feature of structured products, and one that really needs to be understood and appreciated. Particularly by the increasing number of wealth managers, professional advisers and investors who believe that the decade ahead of may present a more challenging investment environment than the decade now behind us, in which it was hard not to make good returns, enabled by the ‘easy money’ economic environment.

The investment environment ahead of us, in which the world moves from Quantitative Easing to Quantitative Tightening, etc., is likely to see professional advisers, and their clients, wanting and needing to work their portfolios harder, including considering different types of investments for better portfolio diversification, instead of restricting their portfolio planning to just asset class and geography. And best of breed structured products present compelling portfolio options, that can add significant value alongside passive, smart beta and active funds, for objectively minded professional advisers and their clients, not least because there are some things that passive and active fund management just cannot do. Structured products can help fill that gap, notably offering the potential for positive returns in range bound, possibly flat and / or falling markets, in addition to reducing and controlling exposure to downside market risk.

We think it is time (and timely) to think carefully about and understand the differences between active fund management and structured products and to recognise the merits and attributes of best of breed structured products.  Many investors may be better served by, and happier with, structured products, working alongside risk managed long only investment portfolios.  (As always, investors and advisers must be cognisant of exposure to the counterparty/issuers, plan manager and investment risk of the product held).

So, a call to action: a call to think carefully about the fundamental problems with active fund management and objectively about the benefits and advantages of ‘best of breed’ structured products, working in unison with a well-constructed investment programme is best advised, always.

In our reviews with our clients we are discussing the fundamental merits of the combination of the investment solutions, as investment markets change.