Experts in the structured product space are predicting a convergence between the asset class and traditional long-only funds, leading to the growth of structured funds, rather than the vehicles being positioned separately.
According to Gary Dale, head of intermediary sales at Investec Structured Products, it was fair to expect the emergence of more actively managed strategies, as well as the divergence of the structured product asset class as a whole. As more advisers used wraps and the distribution channel grew, open-ended funds would act as wrappers, with structured products within them. In his opinion, this labelling of structured products and trying to put all these products in a box is ridiculous. Previously, fixed-rate bonds or structured products with-profit vehicles were the most popular, best-sold structured product ever to hit the UK shores – not always the best, but nonetheless a structured product. He claims that the reason they’ve been labelled and boxed together is because, as more IFAs migrate client portfolios onto wraps and funds platforms, if closed-end structures don’t appear, then they’re dismissed – which is where the mutual fund story will start to win and gather momentum because they become more available on wraps and funds platforms. Investec has been looking at developing structured Ucits vehicles that may include both active and passive approaches, likely to be launched in the fourth quarter this year. They will be launching funds – what they will look like and what they’ll be linked to the company are not quite sure yet because they don’t really have a clear focus on where the IFA market is going in terms of structuring around funds. Undoubtedly the products will be initially FTSE-based.
Zak de Mariveles, managing director at RBS, would also be looking at launching new products in the structured fund space. He asserts that RBS has a very extensive range of exchange-traded funds, customised indices, and they have already launched funds specifically in their own internal network and across Europe. They see funds as an important place in the IFA’s heart, in underlying clients’ hearts, and RBS definitely will be in that space as well. It’s important to remember that when one looks at structured products, what we’re talking about is the use of financial instruments, complex financial instruments within those investment banks to deliver specific types of returns and types of payout structures. Mr de Mariveles drew the comparison with constant proportion portfolio insurance (CPPI), a once-popular product that is a capital guarantee derivative security, employing similar mechanics to the interest rate universe. CPPI was used predominantly over the last few years to deliver returns, and so he considers what people are going to see in the fund space is not necessarily structured products as they know them today, but in a fund wrapper. It’s going to be the investment banks, the banks behind these types of products using those financial instruments that they can to deliver specific types of returns in the funds space. So investors won’t just see a capital-protected, FTSE-linked structured product – they are going to be using covered calls, volatility analysis, all these complex tools to try to deliver value for the client, but in a wrapper and in a way to buy it that is very familiar to investors. In his opinion that’s where the market’s going, and certainly RBS will be playing a bit part in driving that.
Tim Mortimer, managing director at Future Value Consultants, claims as the structured product and traditional long-only fund worlds began to converge; his company would be keen to ensure its methodology developed to enable accurate comparisons. The feature of a structured product is that it provides simple risk tailoring to give investors the opportunity to perform well and meet their targets in a number of different market scenarios. The different types include, obviously, principal protection, which is perhaps a little bit out of favour now because of the way the pricing is, but historically, if you were to say to someone, ‘I’ll put you into something that is an equity investment on the upside, a FTSE investment perhaps, but has principal protection’, that’s a very strong story to someone risk-averse and perhaps with simple investment aims. Then you’ve got the autocallables, which have been popular for a number of years, where you say to somebody, ‘You may believe markets are going to perhaps show some rise, but nothing spectacular – the first year the index is above its starting level, we’ll take you out of that investment with a decent annualised return, you take the money and do something else’. That’s in a very strong support base. Then you have the accelerated-type products that say we’ll give you perhaps three times of the first 20 per cent of upsides over five years, cap it out there. Again, if you feel the markets are mildly bullish, then you’ll outperform everything because you’re getting three times upside. So there are a number of choices, and there are also the reverse convertible income products.