After unforeseen complications put the structured products sector on the ropes, eight retail providers have banded together proving the asset class was down but not out
Any marketing manager worth their salt knows unforeseen complications often go hand in glove with great success. Those working in the structured product market have certainly learnt that lesson this year. Even though the sector had bumper sales, it had opprobrium heaped on it by a number of critics.
The collapse of four structured product plan providers since June this year gave detractors of the sector plenty of ammunition. Three out of those four collapsed because they used Lehman Brothers as their counterparty and the untimely demise of this investment bank triggered their sudden deaths.
But the sector decided it is time to fight back. In November, a group of eight retail structured product providers announced that they were banding together to form the UK Structured Product Association. They are Citi, Credit Suisse, Legal & General, Morgan Stanley, Prudential, Royal Bank of Scotland, Santander and Skandia.
“The UK market for structured products is approximately £42bn and these products are seen by many as a mainstream investment tool for UK investors.
“With the recent publicity around a number of products that were linked to Lehman for example, there is a false perception that structured products continually disappoint investors which is simply untrue. The UK Structured Products Association will publish material to put that right,” the association told Investment Week.
Jamie Vale, Legal & General’s business development director, savings, says the formation of the association represents a coming of age for the structured product market: “We have not formed the association as way of promoting these products but as a way of supporting them on a more equal footing as other investment products. We want the association to be the equivalent of the Association of British Insurers or the Investment Management Association.”
One frequently voiced criticism of structured products is that they are complicated and therefore potentially risky. Structured products are undoubtedly more complex than other retail investments because they are usually comprised of two financial instruments that work in tandem to achieve the investor’s investment aims.
There is an added level of complexity because there is no such thing as a typical structured product. “There is such a broad choice of structured products that can be used in a portfolio to service a wide range of risk and return needs that it makes it difficult to point to a typical product. The adviser’s role is to match the product to the needs of the customer,” says Vale.
But the majority of structured products on sale in the retail market tend to offer the investor some type of capital guarantee with the returns paid as either income, or capital growth, linked to the performance of the FTSE.
The capital guarantee part of the product is usually provided either by using a guaranteed equity bond or through issuing a medium term note. The return is generated by using some funds to invest in derivative instruments like options.
However they are put together, the key reason why structured products have proved quite so popular over the last year is that capital guarantees offered nervous investors peace of mind during a time of uncertainty while generating much higher returns than can be achieved from leaving the money on deposit.
The association believes structured products should be more than just being the product of choice when times are turbulent. In fact, they should always be part of a portfolio so investors can generate decent returns whether or not there is a bull equity market.
“Structured products can play a very important part in this because they can not only shelter investors from equity market falls but also generate significant returns, or income, from modest, flat or even negative asset growth,” says the association.
Zak de Mariveles, managing director at Royal Bank of Scotland, says: “Structured products can allow you to have a more defined portfolio based on both markets and your risk appetite.”
The association also says it wants to be more pro-active about countering negative publicity and doing what it can to educate its audience better.
“As structured products continue to grow in popularity, so too will the number of advisers and retail investors using structured products for the first time. As with any investment it is important that the facts are made clear and the fiction is exposed,” the association told Investment Week.
To ensure the association can make its points of view clear to the financial industry, investors and the financial media, it will have to actively educate its audiences.
Vale says: “We are looking at the possibility of structured product events for advisers to help to promote our message and show how these products can be introduced into a well constructed investment portfolio.”
But Vale says that the industry can do much to help itself. “Personally, I believe that the companies who are members of the association should take active steps to make products that are simpler and can be more easily understood.”
Marc Chamberlain, executive director of structured products at Morgan Stanley, says the industry could have done some things better in the past and wants to create a better understanding about investing generally. “We should be more active about educating our client base.”
He agrees structured product providers should fight their critics. “The association is going to respond to comment that is unfounded. That is something we should have done collectively sometime ago,” he says.
Chamberlain believes there are other active steps the sector could take to help its cause.
“There is no industry-driven resource, like there is for other types of investment, where investment performance data is collated.
“It would make it much easier to defend ourselves against our critics if we could point to
data that show that individual products did indeed deliver exactly what they said they would and that they added real value to investment portfolios.”
Whatever steps the association plans to undertake, things will be different for the industry.
After the impact of Lehman on the sector, the FSA is looking at the sector much more closely and it is likely that regulation governing the sector will tighten in the future.
