UK: Growth and income products proliferate despite rising volatility

June 25, 2010

Growth and income plans were by far the most popular style of product over the past three weeks, thereby disproving the prediction that autocall products would increase in popularity.

Further market unrest, exemplified most recently by the ‘flash crash’ on Wall Street in early May and the sell-off that went with it, continues to militate against the long-awaited surge in autocallable products in the UK. Recent weeks have seen Investec, Royal Bank of Scotland (RBS), Barclays and Morgan Stanley all issuing FTSE-based kick-out products.

Experts from a structured products provider comment that the time it took to put these products together and get them to market may have been three weeks prior to the volatility spike. So while people have put growth products out there, autocall products will return. They put their first kick-out product and reverse convertible on the market recently and they have done very well so far.

Other specialists claim autocalls are ideal for investors who think the market is going sideways – they get ‘kicked out’ when the market is at or above the initial level and require no stock market growth. The correction in the market, plus the terms of some autocall strategies, make the structure attractive to investors who see that market cannot fall much further from current levels over the next year or so, but who are also uncertain about growth potential in the stock market given the prevailing economic backdrop.

Smaller boutique firms such as Walker Crips and Meteor have also been issuing kick-outs, with Meteor and Merchant Capital using emerging markets as the underlying for their respective five- and three-year products. They are getting more enquiries about emerging markets and equity exposure in products, according to the managing director at Gilliat in London.

Investec, meanwhile, has launched a bevy of FTSE-based potential and at-risk income plans: the five-year FTSE 100 Income Deposit Plan 11 offers investors potential income at either monthly or annual intervals. Both versions pay an increasing coupon, with the former starting at 2.75% and rising by one percentage point each year, while the latter starts at 0.75%, increasing 0.08% each month.

Barclays, Morgan Stanley and Cater Allen have all issued FTSE-based growth and income products. Smaller firms such as Gilliat and Jubilee also launched growth and income plans, with Gilliat adding to its tally with a three-year UK digital product based on the FTSE 100. The recent spike in volatility has been very interesting for products, in particular any strategy that has a barrier, and experts see this with income and growth products.