Structured products need clarity

Structured products are for the most part viewed as a way of getting a potentially better return while having an element of capital protection, but transparency is vital to their uptake

There is growing interest in solutions within a Ucits wrapper, to deliver enhanced yield over what can typically be found with standard cash deposits.

Less interest has been shown in heavily-defensive structured payouts which bodes well for distributors and clients envisaging a more positive growth scenario, although buyers are invariably keen to see at least some level of capital protection above 50% sticking around most product offerings.

The volatile ride experienced by pure equity investors has signalled a rising demand for competing products which are not starkly exposed to the extreme, fluctuating market conditions over the past three years.

Considering the vicissitudes of the past dozen or so years – the fall-out from the Russian currency crisis, the late 1990s recession, the fall-out from 9/11, through to the events leading up to the crisis triggered by over-exposed American subprime mortgages in 2007 – it is no wonder investors are nervous.

The mantra today is transparency – look before you buy – and fees are also playing an important role in the sales process. Advisers and clients are becoming more concerned about the upfront fees they are paying for products and, unfortunately all too often, a lack of returns.

A steady interest in fund-wrapped structured products is unsurprising in today’s uncertain climate, as there is a more flexible fee structure that investors can choose from. If advisers want to be paid upfront, or are utilising a fee-based platform where upfront product fees are not conducive to their overall business model, different share classes can be constructed to accommodate each respective adviser and platform adopted. Also, the client assets are collateralised and segregated from the fund provider.

Regulation, too, will play an increasing role. Products that take into consideration the fact that advisers are looking for products for their clients that offer income and capital protection without counterparty risk, have found favour. The growing number of funds trying to push into the space suggests that the formula is right for today’s investment climate.