03 September 2009

Advisers have latched on to structured products as a haven from low rates and roller- coaster equity markets. Yet many sales have been stand-alone. Switched-on advisers are integrating Investec Structured Product’s whole collection deep within their portfolio planning.

When Investec first launched its structured products, we made a number of promises to investors and their advisers. First, we aimed to cover a wide variety of attitudes to risk. Second, we made our collection consistently available. Pay-off profiles will change over time, but the collection is always there, providing a sensible and regular suite to match a wide variety of tastes.

Throughout the recent crisis, many wealth mangers will have built tailor-made structured vehicles into their portfolio planning, playing volatility at its own game to secure alternative style payoffs. Other advisers now want to follow their lead with off- the-shelf retail solutions. There are plenty of ideas to consider.

Tracker alternatives

There’s a lot of talk about tracker funds these days. Not surprisingly, investors want a low cost way to ride the rally at minimum cost and risk. Choosing a tracker is easy – spot the one with the least tracking error and the lowest Total Expense Ratio (TER). The arrival of Vanguard and Exchange Traded Funds (ETFs) is already pushing down fund prices and we have already seen Fidelity reduce fund costs as a result.

There is perhaps, another option. In fact, one that may seem too good to be true. How about 200% of the FTSE 100’s performance, uncapped, over the next 5 years. Although dividends are excluded, the market implied rate over the next year is only 3.8%. However, this rate is also implied to fall by an average of 8%p.a. over the next 5 years. Is the loss of dividends really still that important? Should the FTSE fall, your capital decreases one-for-one. But then, all active investors take that risk too.

In addition, there are no initial or annual management charges; making the product even more appealing. It certainly isn’t in a tracker fund; it’s the Accelerated Growth Plan from Investec Structured Products.

Matching expected returns to client objectives

If you are not convinced and would rather stay loyal to your favourite star managers, here is another thought.

Just 18 UK All Companies managers made positive returns over the three years to the end of July, according to Financial Express Analytics data. I am not knocking active fund management, conditions were incredibly tough. Over five years, the picture is better. 79 managers beat the FTSE 100, exactly what they are paid to do. But just 6 out of a universe of around 260 beat the index by a factor of two.

What about forgetting the headline number chasing and instead, match expected returns to the client’s objectives. Our Geared Returns Plans offer pre-defined pay-off profiles linked to the FTSE 100 with capital protection provided the FTSE 100 doesn’t fall by more than half throughout the investment term. Equity investors already assume this risk when buying equity collectives so soft protection by definition reduces the risk within their overall portfolio. The pay-off profiles, simple; 40% over 3 years or 80% over 5 years assuming the final index level of the FTSE 100 is greater than the initial index level. The index only needs to be greater at maturity and the plan delivers either 40% or 80% growth dependent on the plan chosen. Equity-linked investment with pre-defined performance, have a look and change the mould.

Helping cautious investors weather the storm

After the hammering they have taken, investors are a little shell-shocked. Yet portfolios still need to be rebalanced and redesigned to not only weather the storm of further falls but also to deliver upside performance in the event of a market rally.

Future performance boosts in any asset class are not guaranteed, be it equity, property, bond or commodity. Our Accumulation plans however are well placed to benefit from a rise in the FTSE 100 with the additional benefit of capital guarantees. From 23% over 3 years, to 50% over 5 years, like our Geared Returns Plans I’ve already mentioned, the FTSE 100 simply needs to be greater at maturity for the Plans to deliver growth. Cautious investors usually need certainty so knowing the possible outcomes of an investment as part of a portfolio gives confidence and with a choice of investment terms, clients can tailor portfolios to meet different needs. Security and re-assurance, two key words investors have grown to like over the past few years.

Kick-Out plans come into their own

The conflicting economic news is not good for anyone’s sanity. What can you recommend when the outlook is so obscure? Will the recovery be U, V or W shaped, or a ‘square root’ plateau? Throw in quantitative easing and we are truly in unknown territory when predicting how markets will react.

This is where Kick-Out plans come into their own. True, the structures may be more difficult to explain, however investors know where they stand at the end of every year. If the FTSE 100 is greater on each plan anniversary than at the start date the Plan matures early and kicks out the initial investment plus the appropriate payment. For those parking their cash, there is no interest rate higher than the 5.75% we offer on one of our Guaranteed Kick-Out Plans – and of course, the capital guarantee at maturity is included.

For those of a more positive disposition, what about our Enhanced Kick-Out Plan offering 12.5% per annum, with capital only at risk if the FTSE 100 falls by more than half over the next 5 years? Once again the Plan matures early and kicks out the initial investment plus 12.5% provided the FTSE 100 is greater on any Plan anniversary than at the start date.

Of course, we, you and every fund manager hope that the FTSE will rise over that time. If it does, your investors will be free each anniversary to take stock of their investment options. If they are happy to go back into the markets, we will be glad we helped you get them there. If they still remain wary, there will be more Investec Structured Products to suit the next phase of the investment cycle.

Gary Dale is Head of Intermediary Sales at Investec Structured Products.