Any investor reading the Sunday papers in the last 12 months has been bombarded with warnings about structured products so it is a relief to see at least some products bucking the trend and maturing early with positive returns.
If the FTSE 100 stays above 4,206, Premier Fund Management's 10th limited edition structured product, launched last August, will mature and clients will get back their capital plus 8 per cent growth. It is the second in a suite of structured products offered by the specialist provider that looks set to mature on its first anniversary.
Structured products have gained a bad reputation but some investment IFAs including Chelsea Financial Services bond and VCT manager Matthew Woodbridge are keen to dispel the image of investors' cash tumbling off precipices.
Woodbridge believes there has been a lot of unnecessary scaremongering around structured products and says all products that put capital at risk have been tarred with the same brush. “For three miserable years, income bonds were the only way to get a return without losing your capital but now there are a couple of different solutions available,” he says.
Woodbridge is confident that the Premier products, including the rollover Premier Limited Editions 21 that is on offer at the moment with almost identical terms, will do well.
He accepts that the products are not for everyone and there is a risk attached to them but says: “First, people need to understand that this is not a precipice bond because there is no downside gearing. These are innovative and do something different. They were a good bet 12 months ago and I would hope that they will continue to perform.”
Woodbridge believes that markets will stay fairly static over the next 12 months, which will make it harder for advisers to generate significant growth for clients, but he thinks there are a few products on the market that can provide excellent growth for investors looking to invest a minimum of £5,000.
Lowes Financial Management managing director Ian Lowes has invested some of his own money in a couple of Premier products and likes the provider's approach. He says: “Premier has done well to structure an almost identical product on similar terms. They are probably operating on very fine margins.”
Although he points out that investors have to be prepared to tie up their capital for six years, he recommends Premier Limited Editions 21. He believes the contract is unlikely to run the full term because the closing level of the FTSE on any plan anniversary only has to equal the closing level of the index in October 5, 2004 for the contract to mature.
He says: “In our opinion, the growth rate of 8 per cent simple per annum is likely to prove attractive, coupled as it is with a significant level of protection to capital.”
Lowes also believes NDF's UK defined bonus plan and European defined bonus plan could see strong performance in the next 12 months.
One product on which he was less keen was the Ladder plan launched by HSBC Asset Management last November, which targeted pension investors and was designed to return capital plus a minimum of 6 per cent growth. Lowes describes the contract as overly complicated and says it contained a number of unattractive features including a cap on monthly rises in the index with no corresponding collar on falls.
He says the product would take months of maximum index rises to recover any significant falls even though it offered a minimum 6 per cent return and two lock-in levels.
Discount broker Willis Owen head of communications Kerry Nelson is another fan of Premier and thinks other providers should take note of its approach. She says one of its major virtues is the simplicity of its pricing structures. She wants to see more products that exploit the market but are simple for investors to understand, using kick-out phases on the anniversary of the fund.
Nelson says: “Advisers need to make absolutely sure they know what they are talking about when they look under the bonnet of a structured product as most of them operate on many layers.”
But she is unconvinced that one successful set of products will draw more designers towards the structured market and is even less confident that the bigger insurance providers will look at these investments. She says: “This type of product provides a good halfway house for an investor who wants something better than a deposit account but is not confident enough to invest in the stockmarket.”
Nelson adds a note of caution. “These products can obviously fit well within a balanced portfolio but investors have to use their imagination and be very mindful of all possible end results.”