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Structured thinking

Structured products have grown in popu- larity as investors look for more creative ways to hedge their losses in uncertain markets.

However, the hangover from the precipice bond debacle continues to cast a shadow over guaranteed products, with some advisers preferring traditional mutual funds to provide downside protection.

But Barclays Wealth director Colin Dickie believes this is set to change with a new raft of intelligent structured products ready to test the value of active fund management and end IFA distrust.

He says: “We are not there yet but I can see the day when structured products and ETFs will largely cover solutions traditionally met by life and fund companies. You may never need a fund manager again, as structured products can provide you the whole solution, giving cost-effective access to asset classes with a level of capital protection.”

Hargreaves Lansdown investment manager Ben Yearsley contests the view that structured products could replace long-only funds but suggests that ETFs pose a far more real threat. He says: “ETFs give you access to more esoteric investments that you could not get in the past or you could only access through structured products, for example, direct commodity exposure.”

Yearsley acknowledges that ETFs lack the capital guarantee protection pro- vided by some structured products but they compensate with added flexibility on entry and with- drawal from investments.

He says: “ETFs will be much more commonly used by people who are looking for index exposure, whether straight, geared, short or whatever else. In the past, people would turn to structured products but now they can turn to an open-ended product where the price is transparent and they are not tied in.”

AWD Chase de Vere senior manager Jason Walker says structured products can provide a cheap alternative to mutual funds but is sceptical that they could take over the market.

He says: “Structured products will play a more important role in our asset allocation model but I do not think they will replace mutual funds entirely.”

Walker says clearer literature and capital protection have dram- atically changed the face of structured products.

He says: “In the past, literature was not clear enough in terms of risk and the downside risk was greater than it is now. Some of the products were typically geared on the downside and many were linked to narrower indices such as the Eurostoxx 50 or baskets of shares which gave a less broad spread.”

Keydata International distributes structured prod-ucts through the offshore IFA market and director of sales and strategy Mark Owen says there is a marked distinction between the UK and international perception of the products.

He says: “In the offshore market, people are more open to innovative products and there is a greater perception of the relationship between risk and reward and a greater acceptance of different structures. Most products in the UK, apart from specialist creations, are linked to the major indices whereas offshore they can be linked to asset classes such as gold, commodities and renewable energy much more creatively.”

Walker believes this trend may change and risk-averse advisers could soon be swayed by some of the more innovative features on structured products from firms such as BNP Paribas, Barclays Wealth and Meteor.

BNP Paribas is due to launch its Privalto range, which is an open-ended Oeic structured product that has no exit penalty so the investor is not locked in.

Walker says: “Open- ended structures and kickout features available through some of these newer products mean that investors will be able to create some unique investments that are not available on mutual funds.”

Although innovative structures are starting to catch the eye of the more adventurous investor, Seven Investment Management director Justin Urquhart Stewart warns that the accom-panying literature is still too confusing for a qual- ified adviser.

He says: “Literature is either too simplistic or it is so verbose that you have no hope of understanding it. It is always going to be quite complicated but it needs to be sufficiently clear for the average adviser to understand so they can provide the right invest-ment advice for the client.”

Urquhart Stewart says the pricing of structured products is not always clear for the customer and favours the transparent cost and structure of ETFs.

He says: “ETFs are not the magic potion which will cure all our ills but they are helpful. Active fund managers will still have a role to play but they are going to have to be good. ETFs will keep them honest so the good ones will charge a premium price for what they do. Those that charge a premium price for a shoddy service will be killed off.”

Chelsea Financial Services managing director Darius McDermott believes struc- tured products and other passive index-tracking vehicles may appeal to some investors as a cheap way of getting broad exposure to the market but maintains they are not a substitute for good active fund management.

He says: “We are supporters of structured products and where they come with either protection or geared upside, there is no problem whatsoever. But I am a big advocate of long-term quality active management and if you can pick some of the good managers in the UK, that is the way to go.”More investment news and analysis at: www.moneymarketing.



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