Structural risk

14 April 2011 | By Chris Salih

Concerns about the complexity of some structured products have arisen again following a new product launch by Barclays Stockbrokers.

The five-year range 8 income bond is under-written by Société Générale and aims for an annual income of 8 per cent. However, full income will only be paid if the FTSE 100 does not rise by more than 21 per cent or fall by more than 23 per cent from the strike price. For each day the FTSE is outside those parameters, the income accrued will not be paid on that trading day.

This means if the FTSE is in that trading range for 150 days of the 250 for which the FTSE is open, income would stand at 4.8 per cent. If the FTSE is 40 per cent or more below the strike price date at the end of the term, investors would lose a corresponding level of capital.

Lowes Financial Planning managing director Ian Lowes says: “Both income and capital is at risk with this product. You could have a scenario where the Government has got its calls right and the markets look rosy and the FTSE is above 7,200 and rising. That would mean your capital is OK but you will get no income while that continues if the strike price of the FTSE 100 is around 6,000.

“Conversely, the market could fall by more than 40 per cent by term end. Falling below 3,600 is something that has happened before and could happen again.”
Chelsea Financial Services head of investments Matthew Woodbridge says: “It looks more like an institutional trade for the retail public. We prefer to offer our clients the certainty of both capital and the coupon.

“Most products pay a fixed income and it is the original capital at risk, not both income and capital. The level of the potential coupon is clearly tempting to investors due to continuing low rates of interest being paid for funds held on deposit.”

A spokesman for Barclays Stockbrokers says: “Barclays Stockbrokers is an execution-only service and does not offer investment advice. Our clients indicated an interest in products that could generate income from different market conditions.

“The Société Générale range 8 income product was made available for our self-directed brokerage clients who are uncertain about the FTSE 100.”

Michael Philips proprietor Michael Both says the client does not have “a hope in hell” of understanding the risk. He says: “If you offer a complex structured product you should say, could I offer the client two simple products that would have the same effect and if I could do that, would that be better value and be more easily understood by the client?”

The structured product industry has worked hard to improve its reputation following the losses experienced by clients investing in Lehmans-backed products. But many advisers say the sector is still too complex and see the Barclays product as an example of this.

Skerritt Consultants head of investments Andy Merricks says: “I do not touch them in general as I think they are oversold for the benefit of the distributor rather than the client. We are in a market where you need to be able to move around and structured products do not allow you to switch if you change your mind on how the market is going.”

Hargreaves Lansdown founder and executive director Peter Hargreaves has been an outspoken critic of structured products. He says: “There is a golden rule in invest-ment that you should never buy any investment you do not understand. It correlates that if the person selling them does not understand then there is no chance for the unsuspecting victims.”

However, Lowes believes advisers should be open-minded on the investment opportunities offered by many structured products and not put off by the over-complexity of a minority. He says: “A huge range of structured products do precisely what the client wants and needs and those who do not understand that do not understand the market.”

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