The last two years have been a bruising time for structured products but Lowes Financial Management managing director Ian Lowes says a few bad news stories should not tarnish the whole market.
He says: “Structured products take many guises and, as with any investment solu-tion, a good adviser should be able to sort the wheat from the chaff. You can name on the fingers of one hand the bad news stories in structured products but I can give you countless examples of structured products that have offered significant, safe returns.”
Lowes’ company runs StructuredProduct Review.com, a website aimed at giving IFAs a better understanding of structured products and providing information for advisers to analyse the different products.
“I do not need to defend structured products, the evidence is clear,” says Lowes. “Over the last six years, the cautious managed sector has risen by around 30 per cent, but last week we had a six-year structured product maturing with a 63 per cent gain and that investment would have only lost money if Barclays had gone bust or if the FTSE had dropped below 2,210. Six years ago, that looked to us like an attractive investment working alongside a balanced portfolio and we were right.”
The failure of Lehman Brothers helped catapult structured products into media spotlight. The crisis over Lehman-backed products offered by NDFA, Arc Capital and Income and DRL led to over 5,500 UK investors losing money. It also led many IFAs, investors and officials to question the legitimacy of a product backed by a bank that could fail.
But Lowes argues that structured products became a fall guy for the whole collapse of Lehman Brothers. He says any investor who lost their life savings due to the failure of a Lehman-backed product alone should question the diversity of their investments.
He says: “The banking crisis made the counterparty issue loom but that is wrong because counterparty risks were always there. Ultimately, what happened was one counterparty, rarely used in the UK and representing only a small amount of all structured products, failed.
“Yes, if the counterparty goes bust, you lose your money but if the banks do fail it would be a catastrophic economic event and then your investment portfolio will not be held up by the structured products alone – all your mutual funds, your bank account, your firm, your pension and everything else is affected.”
Ian Lowes: ’Anyone who simply says they are all bad needs educating because any adviser educated in structured products will realise they are not all bad’
Lowes says the media storm meant many people wrote off the whole sector.
“To just say I am not going to do structured products you ignore a whole area of the market. If you take structured products as just a few bad cases and throw it all in the same boat you are going to miss the opportunities in this market and you will ultimately do your clients a disservice.”
Lowes thinks one of the problems is under-educated advisers. He is confident if more IFAs took the time to learn how structured products work and what they do to divert risk, more would consider them for their clients.
“If you are going to criticise the sector, you have to be in a position to do so and, to be in that position, one has to understand them. Anyone who simply says they are all bad needs educating because any adviser educated in structured products will realise they are not all bad.”
He says, for example, advisers can use structured products as a means of offsetting doubts in the market right now.
“There is a structured product out recently from InCapital, which have just taken over BlueSky, which, to me, is a good investment opportunity as part of a balanced portfolio. The plan is a six-year investment and, at end of it, if the FTSE is up, you will get a 72 per cent gain. If it is down, you will get your capital back unless it is more than 50 per cent down then you will lose in line with the index.
“Of course, the market might be 100 per cent up in six years or it might be 30 per cent down. No one knows what is going to happen to the market over the next five years but all I know is that I don’t know.”
As a result of their ability to offset market upheaval, Lowes thinks the UK market will grow to that of the size of the structured product markets in Europe and the US.
He says: “I think while there is a danger that you just say ’I am going to just use structured products’ in this environment, there is no doubt in my mind this is a rapidly expanding market.
“In an ideal world, we would have consistent markets and managed funds would provide the perfect solution for most investors but markets are anything but consistent and fund performance depends on the manager’s ability and sometimes even the best ideas are not good enough.
“Investment times are changing and the evolution of structured products as a mainstream retail investment solution is testament to this.
inancial advice is an art, not a science, and I am practising my art with the help of structured products. If you disagree and think all structured products are the same and do not give them due consideration, you will not know what your clients are missing.”