Redefining the UK structured products market

Do you think there is a fair understanding of structured products in the UK retail market?

Yes, but the UK structured product market needs to be redefined and re-positioned. Many in the financial services sector promote structured products as a stand-alone asset class but, we believe structured products are simply an alternative, in some cases more efficient, way of accessing specific asset classes. Rather than being seen as an alternative to equities they should be seen as complementary and a means of tailoring an investor's return profile across their entire portfolio.

The structured product market is at a crossroads and it is imperative that the industry re-defines how structured products are presented, and more importantly used, within portfolio management. Clients' objectives are delivered through careful investment planning and risk management techniques to tailor return profiles appropriately. Investec, in designing its collection of structured plans, aims to deliver a range that enables advisers to deliver these objectives in a simple and transparent way.

Why are you launching a collection of structured products?

We see the UK structured products market as having huge growth potential. Historically UK structured product sales has underperformed in comparison to its European peers. There are many reasons for this, but primarily it is due to different distribution models and a greater appetite among UK investors for traditional equity funds. European investors have tended to prefer fixed income-type returns.

The recent growth in the US structured product market gives us confidence the UK advisory market will follow the US model and utilise structured products as alternative and complementary medium-term growth investments. We believe the catalyst to success will not be product innovation but a development in the understanding of how to utilise structured products effectively to offer attractive return profiles, balancing the risk of the investor's overall portfolio.

Structured products can achieve this in a range of environments, whereas traditional long-only funds are far more one-dimensional. The current market environment gives a perfect opportunity to demonstrate the effectiveness of using structured products within a wider portfolio.

How will Investec's collection of structured products look?

We are offering a collection of competitive and continuously available products that are designed to have wide appeal among investors.

To help advisors and investors alike we have categorised our products into four key themes:

l Accumulation plans are generally quite conservative and are designed to guarantee the initial deposit at the plan maturity date, and, at the same time to outperform 'cash like' investments; and

l Investment plans are more growth focused and are designed to deliver accelerated asset growth in both a protected and unprotected way.

l Income plans are designed for investors looking for superior income while minimising the risk of capital loss;

l Structured funds involve using derivatives to develop a range of funds designed to create performance characteristics that are complementary to investors' existing portfolios.

As an example of our new approach to this market, within our investment plans we are delivering a plan that offers a return profile suitable to clients who are willing to accept the risks inherent in investing in the UK equity market. This plan offers a one-for-one downside with no guarantees or protection but, in return, delivers an uncapped geared return of 170% of the growth in the FTSE 100. We believe that structured products do not always need to focus on guarantees or protection to make them attractive. Our approach is to design plans that can be used to complement and enhance an investor's existing portfolio beyond what is possible with traditional investments.

Finally, in addition to our continuously available retail plans we will be offering a bespoke service to allow advisors to design products to meet specific investor needs.

How will you be distributing your collection of structured products?

They will be distributed primarily through financial intermediaries and wealth managers, who are becoming increasingly important in the continued growth of the structured products market.

What makes these structured plans offered by Investec different from others in the market?

Apart from Investec's commitment to product transparency coupled with outstanding client support, we believe our plan range is competitively priced. Many features of the core products themselves are common-place in the market, but collectively our range offers the advisor a solid foundation to introduce and discuss the merits of structured products to clients in an uncluttered way. Simply we believe we stand-out from the market in our positioning of the plans and our ability to further develop the collection incorporating advisor feedback.

What changes have characterised the structured product market over the past few years?

The biggest change we've seen is the increase in the number of manufacturers and distributors. Add to this the wider variety of underlying asset classes used and the greater complexity in wrapper construction and one could argue that this marketplace has become a lot more complicated over the past few years. This is making it more difficult for advisers and investors to fully understand some of these products and make an informed choice as to which plans should be used. All too often the industry has become absorbed by high headline numbers and attractive rates of income instead of fully understanding how structured products can be used to complement the investment process.

Change and development are both good for this market but it is important that change is not for changes sake, but for the benefit of the investor.

What impact do you think the US structured product market will have on the UK?

The US structured products marketplace started around five years ago and is growing rapidly. US structured product sales have increased from $28bn in 2003 to $114bn in 2007 (source: www.structuredproducts.org). We believe that it will continue to develop and that trend will feed into the UK market. Demand will increase as structured products become better presented to users.

Do you think structured products will succeed in taking a greater share of the retail market?

Yes, definitely. The structured product market has evolved over the past five years but the size and volume of the market has remained fairly constant at around £6bn pa. The 2007 figures were encouraging at £6.6bn and the market is predicted to grow to around £8-10bn over the next two years (source: www.structuredretailproducts.com).

What is interesting is the way that distribution dynamics across the market have changed. The market was originally dominated by banks and building societies selling structured products as defensive investments and alternatives to cash deposits. The distribution then swung in favour of IFAs until the precipice bond problems struck in 2002/2003 at which point the banks and builders once again became the most important distributors.

Over the past couple of years, developments in the market have started to move the distribution power back to advisers and we expect this trend to continue over the next few years. At Investec, we see the opportunity within the adviser space and hope to redefine how advisers utilise structured products within the investment process.

What impact do you think the credit crisis and current economic slowdown will have on retail uptake of structured products?

The credit crisis has reinforced the point that advisers need to take great care in understanding the risks within particular products. Guarantees and third-party protection need to be fully understood and explained to clients.

We believe that the credit crunch and current economic downturn offers the perfect platform with which to demonstrate the unique ability for structured products as investments, in balancing a client's expected return profile together with their appetite for risk.

Faced with increased volatility and possibly lower returns, we expect many investors to be looking at ways to decrease investment risk while maximising growth opportunities. For example in our Geared Returns Plan we recognised this, and it made sense to design a product that offered 10 times the upside in the FTSE 100 with a cap at 70%. In other words, the FTSE 100 only needs to grow at 1.4% per annum to maximise the return available. Capital is at risk if the FTSE 100 halves in value and does not recover to its original level over the investment term.

What future innovations in structured products do you see as being most likely?

As mentioned, the industry has reached a crossroads and it is imperative we redefine how structured products are used within the investment process. There is always room for innovation; however more importantly, there is a need for greater transparency in the way that structured products are presented. We must ensure that structured plans are designed with the investor in mind and offer an attractive balance of return and risk.

I would also expect to see the funds space to grow using derivatives to deliver return characteristics that, in many cases, will offer more efficient ways of accessing particular markets. The UCITs III directive has created opportunities for development and I would expect to see the delivery of a number of alternative investment vehicles over the coming months. Investec's collection will include such funds.

How should intermediaries advise clients on the different types of structured product currently available in the market?

Intermediaries have a number of important considerations during the investment process including the client's objectives, return profile and appetite for risk. In addition, Treating Customers Fairly (TCF) principles outline specific issues that also must be covered.

Notwithstanding the current market climate and ever-increasing focus on risk our advice would be:

Focus on those products that are transparent, and avoid being over complicated.

Invest in plans delivering return profiles that match or complement the investor's needs and appetite for risk.

Buying a product because it is guaranteed may not be the best solution available so we would encourage advisers to research the structured market place fully to make a more informed investment decision.

Select a provider with a strong brand and a commitment to offering the highest-quality client service.

Finally, how would you sum up Investec's suite of structured products?

Our plans have been specifically designed with both the investor and adviser in mind. The collection provides a strong foundation offering simple and transparent products allowing the adviser to take a different approach to investment planning.

Tim Mortimer is managing director of Future Value Consultants. FVC publishes in-depth research on the structured products market which can be found at www.futurevc.co.uk/research. FVC does not endorse products from individual companies.