Providers are starting to launch structured product funds to overcome accessibility hurdles.
One of the obstacles to buying structured products is that many platforms do not offer them but packaging structured products in a fund structure gets round this problem as funds can be easily listed on platforms.
Accessibility is a key driver behind Investec Structured Products’ decision to create its first Ucits structured product fund, which is due to launch on Friday.
The objective returns fund is the umbrella fund and the first sub-fund is the FTSE enhanced kickout series 1.
Investec intends to launch additional subfunds over the course of the year to cater for different risk and return appetites.
The sub-fund has a minimum investment of £3,000 and a maximum term of six years, with the potential to mature early at the end of each year if the FTSE 100 is above the level it was at when the investment was initially made. In the event of an early maturity, investors will get a return of 7.75 per cent for each year the fund is held.
If the fund runs for the whole term and the FTSE 100 remains above its initial level, it will return a 1 per cent gain for each 1 per cent rise in the index over the investment term. If it finishes below the initial level, the fund will return investors’ capital.
The barrier can be breached at any time during the investment period. If the FTSE 100 falls by more than 50 per cent from the initial level at any time during the investment term and finishes below its initial level, the investment is reduced by 1 per cent for every 1 per cent fall in the index.
Investec offers a structured product that is similar in design. The collaterised Investec FTSE 100 six year kickout plan offers a 9.5 per cent return for each year held, provided the FTSE 100 closes at or above the initial level.
Compared with the product, the fund has a lower coupon and the barrier can be broken at any time during the investment term rather than only at the end of the term.
Investec Structured Products head of intermediary sales Gary Dale says the fund offers investors more protection, but this comes at a cost. He says: “There is always a price to pay and the more protection and comfort you want, the higher the price is. The more safety in the product the greater the trade-off in returns. With the fund, you have got liquidity, accessibility and you can trade in and out and for that there is a price.”
Dale adds there is more security in the fund in comparison with the product, as the product is collaterised with debt from five banks, including HSBC, Nationwide, Santander, RBS and Lloyds, while the fund is collaterised by developed market government debt.
He says: “There are certain parts of the distribution market, like discretionary managers and high-end wealth managers, that only deal with structured funds. They do not want exposure to counterparties. They like the liquidity of the daily trading and daily valuations and the fact that the fund is accessible via any wrapper.”
Lowes Financial Management business development manager Sham Yapa says: “Most structured funds are issued via the Ucits regime and it has specific collaterisation and diversification requirements. You cannot have more than a certain exposure to any one asset provider.
“Clients are often more comfortable using a fund under a Ucits framework than using a structured product from one provider which chooses its own risk regime.”
Yapa says Lowes Financial Management is considering launching a structured product fund as it sees a gap in the market. It is aiming to launch an actively managed fund with a diversified portfolio of structured products. Other structured product funds in the market include the Citifirst Funds UK auto-call fund and the Premier alternative strategies fund.
Premier sales and marketing director Simon Weldon says the Premier alternative strategies fund, which holds 46 structured products, offers clients strong diversification.
He says: “Diversification is very strong in the fund, which gives you exposure to a wider number of counterparties and assets than an allocation of three or four structured products in a client portfolio.”
Whitechurch Securities managing director Gavin Haynes says he would prefer to invest in a fund of structured products rather than a structured product in a fund structure.
He says: “Diversification is key here. The risk is spread across different product providers in a fund of structured products. A fund would also give advisers access to institutional structured products that tend to be lower cost than a retail structured product.
“The daily liquidity of a fund is also attractive. This makes them more flexible than structured products that have a fixed term.”