Investec Structured Products
Posted on:
21
Jul
2011
by Michael Wilson
Maybe it isn’t such a coincidence that structured products are among the most innovative, fast-growing investment products on the market, but also the most widely misunderstood? The sector has been under a very public cloud for much of this year, as the FSA has stepped up its campaign against providers who don’t tell it like it is to their clients. In one sense, the recent series of record fines against Barclays and the like, for misrepresenting the downsides of a supposedly ‘safe’ structured investments, is a reflection of a regulatory failure as much as it is of irresponsible practitioners. But it doesn’t alter the fact that investors aren’t hearing enough good things about structured products – only the bad news, which makes for better headlines.
And that’s a pity, because the structured products industry is working hard to deliver a safe and sensibly-judged solution whose benefits and safeguards are actually much more substantial than the common perception.
Investec Structured Products has only been in the business since 2007 – with its first products going on sale in early 2008 – but its campaign for more clarity and a more predictable range of outcomes has already scooped it six structured product awards from four different industry bodies. But clarity is only part of the task, it says. It’s also been about rethinking the product range so as to give IFAs a clearer image of the divergences between various investment categories – most notably, the crucial differences between structured deposits and structured investments. Only then, says Gary Dale, Head of Intermediary Sales, will they be in a position to guide their clients to product portfolioss that precisely match their needs and their risk profiles.
A Booming Market
But first, let’s put some numbers on the industry. Demand for structured products is certainly on the up-and-up, with sales broadly trebling from £7.2bn in 2007 to £12.2bn in 2010 and a projected £20bn in 2011. But, although assets under management now total more than £52bn, that’s really just a drop in the ocean compared with UK unit trusts and OEICs, which account for £555 bn of assets under management. Or even with the £94bn in investment trusts. Investors are still wary.
Investec says it aims to reach three separate types of user with its structured products – the wealth managers, the UK life companies, and most importantly the retail investors who it reaches through either IFAs or other intermediaries. Some of these products are “white-label” packages designed for offshore life assurance companies – but ultimately, it says, it’s always the IFA which is the primary link to the end-user.
Investec’s search for predictability is reflected in the distinctive way that its products are released. Rather than issuing funds at irregular intervals, the company supplies an almost continuous series of offerings to IFAs, each of which will be typically open for a period of six to eight weeks before another one follows, normally within days. What this means, says Dale, is that IFAs don’t need to feel under pressure to catch any particular bus, because they know there’ll be another one right along behind it. The current offering is the 25th in the series.
Investec’s range of products has developed over the last three years from just one set of products to a two-track design consisting of structured deposits and structured investments. By continually adjusting the balance between these two classes of products, ISP says, it’s able to fine-tune the performance to the investment situation of the moment. And the pay-off profiles are further tweaked to achieve the maximum consistency. “We don’t believe in multi-index pay-offs, or in changing the risk profiles of our plans to artificially inflate any given profile,” Dale insists. “It’s all about simplicity. We think that sort of distortion was where some of the early bad publicity for structured products originated”.
Simple Structures
Technically, there isn’t anything particularly non-standard about ISP’s funds. As with most other structured products, perhaps 75% of the invested cash goes into bank CDs or other utterly-safe deposits, and the remainder is sent back to the specialist desk to be invested in a balanced set of derivative contracts whose contingent outcomes will reflect a very specific movement in the underlying market – whatever it happens to be. The overall effect is that the performance of the whole product should always replicate the overall outcome of the index in question.
Isn’t it rather a misnomer to call some of these products passive investments, given that they spend their whole time juggling derivatives contracts? Dale laughs. “There’s a lot of hype that gets talked about this, but it’s actually a lot less active than it sounds. After each issue goes out, and after the two-week cooling-off period is over, we simply ‘strike’ the product – that’s to say, we buy the assets, and that’s it. The contracts are then held and managed by the derivatives desk. And what the client has bought is a contract with the bank, which says that upon maturity – maybe between three and six years – the bank will return the principal plus a variable rate based on factors X, Y or Z.”
Matching the Product to the Client
So where do structured products really belong in a private investor’s portfolio? Well, says Dale, it’s essential to strike the right balance between structured deposits and structured investments for each client. Structured deposits (or ‘equity-linked deposits’) are suitable as alternatives to cash investments, but they can never be proxies for equity market investments, which are riskier by nature and which are better served by structured investments.
Structured investments can be designed with varying levels of capital protection – full, ‘soft’ or (more unusually) products that are completely without protection but which offer significantly better gearing on the upside. For instance, Investec’s (unprotected) Accelerated Growth Plan doesn’t shield the client from any downturns, but it comes with a proviso that, upon maturity, it will double the upside. Which would make products like these an attractive alternative to a typical tracker.
The IFA’s task is always to tailor the structured product to the client’s own safety requirements, and also to his own expectations. A cautious investor might request ‘soft’ protection against downturns, whereas a more confident investor – perhaps with a longer investing career in view – would be happy to cope with less protection for the chance of higher returns. Viewed like this, you see that structured investments are not designed to outperform, but rather to provide definition on the upside and the downside, to be shaped by the client in collaboration with his IFA.
But Dale is forthright about why the industry needs to take the FSA’s recent criticisms seriously. “The current cloud over the structured products industry will not blow over quickly,” he says. “And most of it dates from the 2007 Lehmans debacle in the US. But the difference between the Fed and the FSA is that the UK regulator has taken a much keener interest not just in the products themselves, but in how they’re marketed and distributed, with special regard to due diligence.” (And that, we might add, is the main drift of RDR.)
“I don’t agree with everything that’s come out of the FSA,” he says. “But there’s a lot of common sense in those decisions, and they’ve made the right start.”
