Comparing index trackers with guaranteed equity bonds is like comparing elephants with giraffes. What does it tell us? Nothing, other than they are two very different beasts.
The IMA’s choice for comparison is an interesting one. GEBs are indeed a form of structured product, but they are not the most widely available investment, nor are they in any way representative of the structured product market as a whole. By highlighting the performance of National Savings & Investments GEBs, the IMA has also – and this is crucial – elected to compare trackers with products backed by the government. These are, in other words, very low-risk, low-return products (technically deposits) with a state guarantee. Not the most obvious choice for comparison with a pure equity investment in which investors’ capital is 100 per cent at risk.
The key problem, of course, is that the contrast makes no allowance for investors’ appetite for risk. These are in no way, shape or form products that would share the same space in a comparison website. The question, therefore, is: what would make a fair comparison with trackers? More meaningful would be capital-at-risk structured products in which participation to an index is geared. Typically, geared products have a protection barrier under which capital becomes at risk; in the event of a breach, investors simply receive the index performance, without dividends. The idea of a product like, say a supertracker – which is a geared play on the FTSE 100 – is that by giving up dividends investors hope to gain greater capital growth.
These particular products now have been maturing in good numbers for the past five years and to the best of my knowledge have produced good returns. In more detail, Barclays Wealth alone has seen nine maturities of the supertracker product. Five of these have outperformed the FTSE total return index; but that does not take into account UK tracker fees, which the IMA estimates at 1.05 per cent (fee taken as average TER). Add in trading and stamp duty costs and the average TER for UK trackers rises to 1.12 per cent, according to the IMA. Include these costs, and six out of our nine maturities have outperformed the average UK tracker fund, while relative performance is better across the board. Add in the cost of advice and the picture would undoubtedly improve again. Either way, what these maturities show is that the enhanced upside potential of a structured product with a similar risk profile to a tracker more than makes up for the dividends forsaken by the investor. And that neatly illustrates a wider point.
By using a tracker fund as a basis for comparison, the IMA’s research should – but doesn’t – take as its starting point capital being at risk. Instead, it starts at a point of no risk to capital (GEBs) and, from this highly advantageous position, it criticises the performance of a product that was never meant to compete with a pure, unprotected equity investment. As a result, the IMA’s research is as insightful as observing that a tank is slower than a motorbike.
To make this is a more constructive exercise – now and in the future – we should ensure any discussion starts with a capital at risk product and proceeds on that basis. Trackers – simple, easy-to-understand products, where the risks are clear – are as good a place to start as any. All we ask is that the subsequent comparison is like-for-like – i.e. the investments involved share a similar risk profile. Comparing a tracker with a geared product like our Supertracker makes sense as, broadly speaking, both products occupy the same place on the risk spectrum. But where there is additional protection to capital, we should take care to shift the product further to the left of the tracker, to reflect the fall in risk and corresponding decline in performance expectations.
The last word on this subject should go the regulator. One of the many FSA documents on structured products states that: “Advisers need to consider these [structured product] features to ensure they recommend a suitable product taking account of the customer’s risk profile, investment objectives and financial needs and circumstances.” Surely this should apply across the board when considering any investment?
Colin Dickie is head of UK retail, investor solutions, at Barclays Capital