He says there has been a wave of new gilt-backed structured products as investors have become more aware of counter-party risk. He says: “People do not feel that secure with banks or rating agencies. It is hard to quantify what AA-rated really means, whereas gilts are a security backed by a very secure institution. These products will become more popular this year.”
Aviva plans to launch a structured product within a Ucits fund structure and intends to minimise counterparty risk through collateral arrangements with Government bonds.
Morgan Stanley is offering another tranche of its three-year FTSE defensive AAA gilt-backed growth plan and cut its pre-defined annual return to 7.25 per cent from 9 per cent. This is payable as long as the index does not fall by over 10 per cent on each annual anniversary during the investment term.
Walker says it will be increasingly difficult for providers to price the derivative in these structured products until interest rates rise. He says: “The one thing going in their favour is the volatility in the markets but if that stops there really would not be any new issuances.”