There has been some very vocal and high-pitched criticism of structured products in the press recently which is focused on whether structured products are complicated, expensive, offer fair value or are too risky for most investors.
The arguments against structured products are familiar to all of the members of the UK Structured Products Association and probably most advisers.
Structured products appear to generate more passionate argument than almost any other form of investment and the association welcomes the debate since it will increase understanding of their potential in an investor’s portfolio of investments.
Clients of advisers that simply dismiss structured products, we believe, are missing out. An ideal investment portfolio should have a blend of assets and investments to prevent concentration of risk and provide the ability to generate returns without the need for a bull equity market.
Structured products can play a very important part in this because they can not only shelter investors from equity market falls but also generate significant returns, or income, from modest, flat or even negative asset growth.
Structured products can also create genuine diversity in a portfolio by linking returns to different assets such as commodities, property, foreign exchange, inflation and interest rates or emerging markets without the level of risk that direct investment would generate.
This is genuine diversification without having to have direct exposure to the underlying investment.
Structured products can also provide investors with access to investments which would be difficult to replicate using traditional means – for example, investments linked to the outperformance of an investment strategy versus a benchmark.
In addition, investors can get easier access to markets which can be otherwise difficult to invest into such as China and India.
We believe that using structured products as an integral part of an overall investment portfolio approach is a practical and easy way to meet an investor’s needs, providing the investor understands where and what their risks are and with whom they rest.
Furthermore, the very vocal criticism of structured products does not reflect the reality since the use of structured products in investment portfolios is now mainstream with IFAs, discretionary managers and general equity fund managers. The retail market, which is still dwarfed by institutional use of structures, has over £42bn invested and is still growing.
Condemning the whole structured product sector is like abandoning unit trusts and it simply does not make sense. The quality of product literature and educational information available to financial advisers and investors has increased dramatically over recent years and this industry has to take great credit for this.
This work is increasing, with great effort being made by a number of firms within and outside the association to educate advisers about the place that structured products can play within a portfolio of investments.
The new regulatory environment created by the RDR and the packaged retail investment products directive from the EU will enhance the environment for structured products and the protection for consumers buying investments and the association welcomes this.
Members of the association also welcome debate about structured products since they are advocates of the value of structured products in modern investment portfolios.
Critics of structured products increase awareness and understanding and it is in providers’ interests to answer them and explain why they believe investors benefit from using them.
Some advisers will never like structured products but their position in the market is established and, as innovation and education improves, we believe that more investors will benefit from them too.
UK Structured Products Association is made up of the following providers:
Citi Global Markets
Credit Suisse International
Deutsche Bank AG
Legal & General
Lloyds Banking Group
Royal Bank of Scotland
Santander Global Banking & Markets
Skandia Investment Group
Societe Generale Corporate & Investment Banking