Head-to-Head: Structured products vs absolute return funds
Which product is the best choice?
In the first of a new series, Lauren Mason pits two managers against each other to make their case on the top talking points and products of the industry.
Kicking off this series are Ian Lowes and Adrian Lowcock, making the case for structured products and absolute return funds respectively.
Structured products
By Ian Lowes, managing director of Lowes Financial Management
It is easy for investors to identify how different structured products will perform; it is part of their design. They give investors an array of pre-defined outcomes at defined dates in defined market circumstances.
Of course, absolute return funds claim to do this too - provide a defined, or at least positive - return over a certain market period.
Funds within this sector must clearly state their objective, and the timeframe over which they expect to achieve it, typically no longer than three years. The difference is many absolute return products have, to date, failed.
The wide variety of strategies being deployed within the absolute return sector led the Investment Association to devise specific monthly performance data.
Lowes launches structured investment strategies fund
This looks at the last 24 consecutive rolling 12-month periods and monitors how many of these periods have been positive and negative.
The latest statistics show that of the 125 funds within this sector, 102 have a full record of 24 rolling 12-month periods. What may surprise investors, however, is that only three of these funds have an unblemished record of no negative returns.
What has perhaps surprised investors more is the scale of the losses some of these funds have produced over the last 12 months, with some running into double-digit losses.
This is alongside the lack of upside potential when markets have been positive. This was identified in research conducted by Lowes whereby the returns achieved by structured products were compared to that of IA sectors, including the IA Targeted Absolute Return sector, covering the last five years.
Structured deposits and capital-protected products are designed to avoid a loss in all circumstances bar a bank failure and so they would not be expected to compete with the returns achieved by the long-only equity funds of the IA UK All Companies sector.
Such products however, linked to the FTSE 100, outperformed the Targeted Absolute Return sector over the period of analysis.
While FTSE-linked capital-at-risk products underperformed the UK All Companies sector, they protected the initial investment from all but a 40% or more fall in the relevant underlying index over the term, to the extent that none returned a loss.
As with fund selection from any sector, numbers are simply not enough.
Qualitative analysis plays a vital part of the selection process, so that investors understand when they would expect a fund to perform and how it will interact with other components of the portfolio.
There are a select number of funds within the Targeted Absolute Return sector that have proven strategies and warrant allocation in particular portfolios.
Numbers cannot be ignored however, and for those investors looking for an element of their overall portfolio to have pre-defined, market-related outcomes, structured products should not be overlooked.
