What is a Structured Product and What are the Key Features?
In their most simple form, we would describe Structured Products as a contract with a bank or issuer. The contract has a pre-defined outcome that if certain conditions are met, an investor will receive a particular return, this is the headline rate of return or coupon. It’s best to split Structured Products into two types; Structured Deposits (capital secure investments) and Structured Investments (capital at risk investments).
Structured Deposit Plans
Structured Deposits are cash alternatives. They’re covered under the Financial Services Compensation Scheme up to £85k in exactly the same way as money in a bank account (for eligible investors). Although they have their upside linked most commonly to the FTSE 100, there’s no market risk. The outcomes are binary. If the market is above a pre-defined level, then investors gather their coupon. If the market is lower than the start level, they receive a full return of capital. The risk exchange is therefore Deposit interests (which have been extremely low for nearly a decade) – or the potential outcome of only receiving a return of capital, as long as the investment is held to term.
Put another way, as there’s no risk to the initial investment (up to the £85K FSCS limit), the main consideration from a cash alternative perspective is the opportunity cost of sacrificing a fixed rate of interest. However, with rates on most cash products still at historic lows and below inflation, that opportunity cost might be considered very low, especially when returns on Structured Deposits can be up to 7% interest per annum. (See the Investec FTSE 100 6 Year Deposit Plan 15 for further details – https://www.bestpricefs.co.uk/structured-products/ftse-100-6year-deposit-plan/)
A capital secure investment, with a 6 year term, offering a return of 7% p.a. simple – what’s not to like??
Structured Investment Plans
Structured Investment Plans are higher risk and offer potential higher returns to compensate. The two key differences are the fact they’re no longer covered under the Financial Services Compensation Scheme and therefore have counterparty risk with the underlying bank (similar to holding a corporate bond). They also suffer market risk if the reference index were to go below a certain level, most commonly a 40% / 50% fall. This market risk is often referred to as a barrier, and is absolutely a risk consideration, but does provide the investors with significant downside protection versus direct exposure to that index.
Structured Product Evolution
The Structured Product investment sector has evolved significantly since the Global Financial Crisis and the Retail Distribution Review. The Regulator (FCA) carried out a thematic review of the Structured Product market place where the conclusion produced an outcome of transparency in relation to the risks and benefits of products, with improved product governance; with more clarity about the contract terms, enabling the target audience to understand structures to a greater extent.
Who do we like?
Investec are seen as the largest provider in the retail market, what defines their proposition and how does it differ from others?
Investec are fundamentally different from most retail banks in the UK because they don’t have high street branches and their associated costs. However, they still need access to deposits and so the Structured Products department are a core funding channel for the bank. This allows them to build products at a highly competitive rate and means the franchise as a whole is very important to the bank.
From a product perspective this means Investec are the only provider that benefit from a full range of both Structured Deposit and Investment Plans. With plans across the risk spectrum from very low risk cash deposits, income solutions, and more adventurous equity alternatives; whatever the investor’s objectives, appetite for risk, and perhaps view on the market, they have a plan that can offer real value. Also, from a simplicity point of view, there are no other institutions involved, the products are designed, built, and distributed by one team. This helps to reduce certain risks (most notably replacement risk) and makes it easier for the investor from a research perspective. Investec are the issuer and plan manager.
Investec have focussed a lot on the theory of the plans, in reality how have they performed for those who have invested with them?
Investec launched into this market in 2008, and since then have issued 1,083 products with an average return of 5.46% p.a. deposits and 9.14% p.a. on investments. Another key point to note is of those Plans which have matured over this time, zero have resulted in any capital loss for the clients.
Although the smaller of the two numbers, the return on deposit is actually more impressive. To consistently generate a meaningful return on cash during a period of sustained low interest rates really demonstrates the value the plans can offer in investors’ portfolios.
The benefits of using Structured Investments vs direct exposure to the market was also nicely highlighted by the Lowes’ challenge to the Investment Association* demonstrating the outperformance generated by Structured Products vs open ended tracker funds.
Click the link below to read the article.
*B. Brearley, ‘IA admits defeat in structured product challenge against IFA’, Investment Week, (https://www.investmentweek.co.uk/investment-week/news/3025398/ia-admits-defeat-challenge-ifa), (accessed 25/10/19)
It’s also worth pointing out that the coupons are net of charges, there is no initial or AMC eroding the investors’ holdings and value. The stated return is actually what the investor will receive on their investment.
Looking at the current market landscape, what are the benefits Structured Products have to offer and why would someone invest their money in one?
We would again separate Deposit and Investment plans to look at their individual merits. With interest rates persisting at historic lows and record levels of money sitting in cash, there is a real opportunity for Structured Deposits to provide a solution for those investors dissatisfied with current cash rates but looking for positive real return.
As an example, there’s currently £267bn in Cash ISAs with an average return of <1%. This is huge fact to consider …. This is an area where Investec have seen an increase in appetite from investors and Investec want to ‘fill the appetite for demand’, with ISA Transfers moving into their Deposit Plans that currently offer coupons of up to 7% (Investec Plan 15). Click the link to read about the terms – https://www.bestpricefs.co.uk/structured-products/ftse-100-6year-deposit-plan/.
Looking at the Investment Plans as an equity alternative, they can be used as an effective way of de-risking a portfolio if investors are concerned about the growth prospects in developed equity markets. With almost unprecedented geopolitical risk causing increased fear and uncertainty, the fundamental mechanics of Structured Products mean they have the ability to produce a positive return in a rising, flat, and even falling market. Combined with the downside protection against market risk, Structured Investment Plans can be a complement or alternative to traditional and direct market exposure.
How can investors access the plans?
The Plans can be accessed through the website of Best Price Financial Services Limited, and in most cases the Deposit Plans are liable for Income Tax and Investment Plans Capital Gains Tax (CGT). They can also be held in all tax efficient wrappers; ISAs and ISA Transfers (Investec have their own ISA wrapper with no charge), SIPP/SSAS, Offshore Bonds (Deposit Plans only). The flexibility and opportunities go even further with UK Charities, Corporates, and Trusts also being able to access the plans.
For full details on the current tranche of products available with Investec please click on the following link – https://www.bestpricefs.co.uk/investec-structured-products/).
There have been some significant changes during Investec’s time in this market, what further developments do you see from Investec as a business and the Structured Product marketplace overall?
Structured Products remain an integral part of Investec Bank and a core source of their retail funding. They have streamlined their offering and the focus internally remains on developing simple, market leading solutions. Combining the uplift in rate and current external market environment, Deposit Plans offer excellent value for an even wider spectrum of investors and financial objectives, with equity like returns for cash risk.
The bank is looking forward and not resting on the success they have had over the last decade (their structured products team has won 25 industry awards since inception). Investec want and need to remain relevant and operate in a way that suits investors best, and at the same time give access to other areas of the bank through one simplified channel.
With regard to the wider market, there has been a slow but positive change in perception towards Structured Products as a concept. More and more investors are embracing the opportunities they give for diversification and return, and they’re now considered a more core, mainstream holding for an increasing number of investors. With a lot of the historic and outdated myths and negative pre-conceptions being dispelled over time, hopefully more investors will be able to profit from the benefits Structured Products have to offer.
Past performance is not a guide to future performance. Performance figures correct as at 30/09/2019 relate to Investec Structured Products, which is a trading name of Investec Bank plc. The plan rates referred to are available until 13/12/19. Investec Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
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