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Providers struggle to launch income funds

Structured product providers are struggling to launch income-focused structured products due to low interest rate expectations and reduced market volatility.

Market and economic conditions have hit providers’ ability to buy underlying securities that deliver high income levels.

When savers invest in an income-structured product, the proceeds go into “safe” securities such as zero-coupon bonds that deliver a steady income.

Providers also sell derivatives called options that generate regular-premium payments in return for the provider agreeing to pay out if a certain event occurs, for example, the FTSE 100 index falls by 50 per cent.

But the products have been hit on both fronts. Income levels on zero-coupon bonds are hovering at ultra low levels as interest rates are expected to remain low for years.

At the same time, the premiums earned by selling options have fallen because markets are not exhibiting volatility, meaning there is less demand to insure against an event such as the FTSE 100 falling 50 per cent.

Merchant Capital director of structured products John Gracy says: “The sort of income that you can get on products at the moment is quite poor.”

Meteor Asset Management managing director Graham Devile says the group is launching income products but they have taken “months and months” to develop because of the adverse conditions.


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  1. There are other alternatives which look very interesting, such as the Gilliat Income Builder, paying potential of 7.2% providing the FTSE100 is above 3000 points.

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