Providers struggle to launch income funds

Structured product providers are struggling to launch income-focused structured products due to low interest rate expectations and reduced market volatility.

Market and economic conditions have hit providers’ ability to buy underlying securities that deliver high income levels.

When savers invest in an income-structured product, the proceeds go into “safe” securities such as zero-coupon bonds that deliver a steady income.

Providers also sell derivatives called options that generate regular-premium payments in return for the provider agreeing to pay out if a certain event occurs, for example, the FTSE 100 index falls by 50%. (article continues below)

But the products have been hit on both fronts. Income levels on zero-coupon bonds are hovering at ultra low levels as interest rates are expected to remain low for years.

At the same time, the premiums earned by selling options have fallen because markets are not exhibiting volatility, meaning there is less demand to insure against an event such as the FTSE 100 falling 50%.

John Gracy, director of structured products at Merchant Capital, says: “The sort of income that you can get on products at the moment is quite poor.”

Graham Devile, managing director of Meteor Asset Management, says the group is launching income products but they have taken “months and months” to develop because of the adverse conditions.