INVESTEC STRUCTURED PRODUCTS
An overview of Investec’s Background and Vision by Investec’s Chief Economist – Phil Shaw.
Cash Risk/Equity Return …… Structured Deposit Plans. Certainly, worth getting to know ……
Read Phil Shaw’s presentation below:
Investec was founded in South Africa in 1974 and after dominating the local market bought our first banking licence in the UK in 1994. In 2002 we listed the UK bank and implemented a Dual Companies structure, Investec PLC on the London Stock Exchange and Investec Limited on the Johannesburg Stock Exchange. The key element of this point is where shareholders have common economic and voting interests, Creditors are ring-fenced to one or the other, and there are no cross guarantees between the companies. This is something that differentiates us from other international banks and reduces exposure to other jurisdictions. As our core UK clients, you will only ever have exposure to our UK bank so don’t have to worry about South Africa for anything more than your winter sun.
Fast forward to 2008 and the world was falling apart. I love regurgitating Warren Buffett quotes and the one that springs to mind is “only when the tide goes out you discover who’s been swimming naked” and another legend from the investment world followed by saying “in 2008 it seemed the whole global financial industry was involved in some form of fiscal skinny dipping at the time”.
However, this created an excellent opportunity for Investec to launch into the Structured Product marketplace. With such widespread fear and uncertainty about even the survival of capitalism, there was high demand for solutions that provided capital protection, and from a product perspective this was a great time for pricing too. There are three key ingredients that go into the coupon on a structured product; interest rates swaps, equity market volatility, and the banks appetite for funding; all of which were favourable and therefore provided attractive returns across the range.
Although there were challenges over this period and a constantly evolving marketplace, it was a great time to start this business and has allowed us to become the number one Structured Product provider. A place that we have maintained throughout the duration with over 36 industry awards.
We have launched 1,651 Structured Products to date, a total of over £6.5bn, and generated an average return of 5.53% on cash, and 9.23% on investments; with none resulting in any capital loss.
However, looking ahead we’re faced with new challenges and need to constantly adapt and innovate. Interest rates have been below 1% for over a decade, there is unprecedented geo-political risk on the horizon, and an adviser landscape that’s constantly changing. This brings me on to the first key topic of discussion – Cash.
Cash Risk / Equity Return …
I say this a little tongue in cheek but it’s something I’ll attempt to validate in a moment. Raising cash for the bank is the fundamental purpose of our business and doing so via our SP operation is something that is more important to Investec vs other retail banks on the street. With no conventional high street branches our central treasury highly values the deposits we can raise through the IFAs we work with, and accordingly give us an attractive funding rate to build these products.
More recently we’ve moved away from complexity, streamlining our offering to meet the demands and needs of our core client base, but also to raise the right type of funding for the bank. The timings are also very well suited as clients across the UK are holding record levels of cash, and in most cases generating a negative real return.
A few examples of this are the c.£267bn currently sat in cash ISA, the fact SIPP investors on average are holding 15% of their balances in cash, and in total there is close to £1.5tr in cash across banks / building societies, and NS&I products.
Using Cash ISAs as an easy example, we’re looking at this marketplace and seeing a real opportunity for all three parties; the clients, the advisers, and Investec. Figures suggest the average return in this space is less than 1%, a negative real return when CPI (at 2.1% currently) gets factored in. I know that not all of that £267bn is going to be actively managed in any capacity, but even if 1% wanted to obtain a positive real return over inflation, without taking on additional risk to capital, this is where Structured Deposits can offer outstanding value at the present time.
Going back to the three pricing factors I mentioned, the one that we have seen change most recently is an increase in appetite from Investec’s central treasury to raise deposits. This has been fantastic for a multitude of reasons. It’s not simply the ability to offer a much higher coupon, with rates of up to 7% interest per annum, but the ability to innovate further within our range. Within the deposit proposition we now have a full suite of short dated 3-year plans, full 6 year terms, kick-out and income; along with defensive versions of each, allowing clients to achieve a positive return in a rising, flat and even falling market.
In isolation that’s attractive looking at some of the headline figures, but the relative value is what I feel is key. The fact we’re able to offer clients such an attractive and meaningful return on cash when things on the high street have remained at such lows, it means the opportunity cost is minimal, and the client is able to invest in a solution that meets their objectives; all without taking any risk to capital.
But what’s driving this internal demand? I think it’s very important to touch on this point to further validate the proposition. Investec are not a mainstream retail clearing bank, as mentioned we don’t have loads of customers with lazy cash sat in accounts. We don’t run thousands of branches with their associated costs, but we still need access to these customers. So, actually you the IFAs are our customer and are of critical importance to the ongoing success of our business.
A quarter of our term retail funding base comes from the IFAs we work with and almost 100% of long-term retail money on balance sheet, which is why clients get the best rates available. Instead of the cost of running branches, clients get the benefit in the rate. And so, this business is the cornerstone of our retail funding and will continue to be. So long as you guys out there, we will be there with products.
Unlike 10 years ago when the high funding rate was being driven by the pricing environment on the back of the financial crisis, at this current point it’s to further improve the liquidity position of the bank along with an increase in the lending activity; ultimately resulting in better credit quality and in the longer term a higher credit rating. I’ve been with the bank 7 years and seen that same number of upgrades across both Moody’s and Fitch. Whilst of course a lot of it is down to my impact 😉 it does also show the bank is very much moving in the right direction.
I said this wasn’t going to be a pure product presentation but going back to my initial statement that we can offer equity return with cash risk. The current Kick Out-Deposit offers a coupon of 5.5%, and the 6 Year Deposit Plan 7%.
These are net returns after all product charges, and what the client will actually receive. At those figures I’m sure a lot of you may agree that’s in line with the growth prospects on developed equity markets, and certainly when costs are taking into consideration. Looking purely at the 6-year version for simplicity and comparing it against the underlying index, the plan can generate 42% over 6 years and only needs the market to be a single point higher over the term. For an equity solution to do the same you would need >42% over the period to generate that upside for the client. And on the flip side, if markets are down in 6 years’ time, the client gets a full return of capital.
Because of their unique risk return profile, I feel our deposit plans are not simply a way of clients generating meaningful returns on cash but can offer a perfect complement to equity portfolios and can be a hedge against the fear and uncertainty out there. But with the hedge it’s not like shorting the market, if it’s higher at the end of the term the client gets that pre-defined outcome. But if it’s negative, the investor doesn’t lose any of their initial capital. Best of both worlds.
Click the link to read more about Investec’s current range of plans: https://www.bestpricefs.co.uk/investec-structured-products/
Investec’s Development Initiatives
Investec are planning a fund of retail Structured Products shortly. The fund summary is expected to target the following:
- UCITs fund incorporated in the UK
- PRIIPS Synthetic Risk Indicator: 3
- Total Return Target of 5% – 7% net of fees
- Target Annual Income of circa 3.25% to 3.75%
- Annual Capital Growth of circa 2% – 3% over the longer term
- Diversified portfolio of defined return investments
- Focus on simple, liquid Investments
- Diversified exposure across Equity, Rates, Credit and FX
- Focus on extracting the asymmetric risk profile of structured products in major markets
- Portfolio Management centred on “defined risk” rather than “defined return”
- Positive returns under a broad range of market conditions
- Attractive risk/return profile
- Daily liquidity
Structured Products remain an integral part of Investec Bank and a core source of retail funding channel.
They’re one of the flagship products for the group and an area we will continue to offer a competitive advantage.
Combining the uplift in rate and external market environment, Deposit Plans offer excellent value for an even wider spectrum of clients and financial objectives. The focus internally remains on developing simple, marketing leading solutions.
The bank is looking forward and not resting on the success we’ve had over the last decade (just the 36 industry awards since inception). We want and need to remain relevant and operate in a way that suits our adviser and clients best, and at the same time give access to other areas of the bank through one simplified channel.
We started out in this industry during a turbulent and highly uncertain period, however, were able to excel in growing our business and providing market leading solutions for clients. Considering the current landscape and significant events on the horizon it feels as though we’re starting a similar journey but are in arguably an even greater position now to continue to prosper together.
Best Price Financial Services are working closely with Investec where we would like a broad range of investors to benefit from a greater understanding of the Risk/Reward pay off of Investec’s Structured Deposit Plans.
Where can a 7% potential return be gathered at no risk to capital?
We certainly think a wider audience who hold long term cash deposits should consider Investec’s plans as part of a portfolio of holdings….
As always, we must confirm:
Don’t Forget the Risks
As with all forms of investment there are risks involved. These plans do not guarantee to repay the money invested. The potential returns of the plans and repaying the money invested are linked to the level of the stock market and also depend on the financial stability of the Issuer and Counterparty Bank.
The promotion of the plans does not constitute ‘advice’ to invest. Advice is always specific to an individual investor’s circumstances and needs, following the process of ‘know your customer’, with the aim of ensuring that any product is suitable for an investor.
As always, the recommendation and common sense approach is to consider product solutions as a portfolio, never over-exposing oneself to a point of financial pain and suffering liquid or counterparty exposure.
As always, if you require advice simply get in touch.
We assure you of our best and focused attention at all times.
Best Price FS Team