Does Structured Mean Good?
Structured Products
A trend we have noticed in the last few months while interest rates have been so low is the increasing sale of structured products by the banks. Typically these products offer an attractive rate of interest but link the return to the performance of an equity index, normally the FTSE 100. They also usually offer some form of ‘downside protection’. On the face of it an easy sale and even easier commission.
However there are a number of issues surrounding these products. For example the guarantees provided within these products have in the past been backed by financial institutions such as Lehman Brothers and AIG – and so in a number of cases these guarantees are now worthless.
More recently Keydata, a leading provider of these products, has gone into liquidation due to the firm incorrectly structuring a number of its investments and suddenly being landed with a huge tax bill it couldn’t meet. While client assets appear to be safe there is likely to an administration nightmare while the situation is sorted out.
So remember:
1. High Returns equals High Risk - whatever the product literature might say.
2. The products are for a fixed term and there is no flexibility to change strategy.
3. Close analysis of the small print will usually highlight the fact that the product is considerably riskier than the headline literature indicates.
4. Unclear product literature can hide unfavourable product features
5. It is important to consider the investment merit of the underlying equity story as well as the headline rate of return.
6. Charges are rarely expressed but are probably high as a consequence.
We have not invested in this type of vehicle in part because the inflexibility does not suit our more active style of investment management but also because these products are more designed to appeal to the salesman rather than the end investor and invariably they are riskier than they appear at first sight and with a few exceptions poor value as a consequence.