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Structural survey

Incredibly, there are no longer any major investment banks in the US. Thousands of people have lost their jobs and many more are sure to go as the financial services industry learns to live without the money that it used to have.

The collapse of Lehman Brothers, one the biggest and best known financial institutions, has lost the asset management industry many, many millions of pounds, not only for the long-only funds that owned the stock but also the hedge funds that got their positions wrong, the firms that relied on Lehman as their prime broker and the companies that used assets provided by Lehman’s equity derivatives desk.

For retail investors, this meltdown has broadly created two ways to lose money – if they own funds invested in nose-diving banking shares or, as has been reported more widely, if they own a structured product that used assets provided by Lehman.

It has not been reported how many fund managers have lost money on AIG, Bank of America, Bradford & Bingley, Citibank, Goldman Sachs, HBOS, HSBC, Lehman Brothers, Morgan Stanley, Northern Rock, RBS or UBS. What has been covered more extensively is that around 20 of the 394 structured products issued in the last two years, according to Future Value Consultants, used assets provided by Lehman.

This comes at a time when structured products have come under sustained attack from the Investment Management Association, among others, for lacking transparency and being unregulated, almost rogue investments marketed by snake oil salesmen to deliberately defraud investors.

To deal with regulation first, the FSA does not regulate structured products but this is because the FSA does not regulate any products. The FSA regulates individuals and firms, meaning that it regulates the marketing of the products that are bought by consumers.

This is the same for unit trusts and Oeics. Mifid and treating customers fairly have changed regulation for the better. Increasing the information available to consumers can only be a good thing.

A further criticism of structured products is that the counterparty is not named in the marketing material. This is due to the public offer for subscription rules. I do not believe that these rules were designed to prevent a structured product provider naming the asset provider but they do. A number of providers are working hard to address this so that the counterparties can be named and this is a development that can only be encouraged.

The final point to address is the allegation that structured products are being marketed as simple products to unknowing consumers when they are actually very complicated and should only be bought by sophisticated investors. Aside from this being insulting to the IFAs that recommend their clients allocate some of their portfolios to structured products, it is incorrect. Any mainstream financial product is complicated and would not be readily understood by most investors.

The real argument, I believe, comes down to what investors want their money to do for them and how best to create a portfolio of investments that will allow them to do it. Structured products are not an investment panacea but they can play an important and valuable part in that process.

There are no investment banks left in the US but there is still a part for structured products to play in asset allocation for investors.

Mark Owen is director of sales and strategy at Keydata Investment Services


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