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Review of loss-making structured products reveals market fallibilities

1 October 2020

Performance analysis of the structured product market over the past 10 years has revealed the products that caused losses for investors and where the market needed to improve.

The analysis, published by StructuredProductReview.com, provides in-depth insight and macro-analysis of the 4,444 products launched in the decade from 2010-2019, including annualised performance data by product type of the 3,895 that matured in the period.

It specifically focusses on the 60 products that made losses for investors during the decade and what can be learned from them. Key issues were caused by American barriers – which track the benchmark throughout the investment period and which meant if the index fell below a certain point during the investment period capital was lost – and products using baskets of stocks and alternative indices.

Commenting on the reports findings, Ian Lowes, founder of StructuredProductReview.com points out that 60 loss-making products out of close to 3,900 maturities “is a formidable record for the sector – which has performed consistently well and rarely disappointed despite the periods of market volatility over the past decade” but that the market had learned lessons during the decade, in particular where change needed to happen to make structured products more investor and adviser friendly.

“Change has occurred,” he says. “The current market has moved away from the characteristics highlighted, such as American capital protection barriers and baskets of individual stocks. These days the majority of products have the familiar FTSE 100 as the underlying benchmark and they use European end-of-term capital protection barriers.

“Also, there has been a move to longer duration autocalls, which has repositioned market risk, as their maximum investment term is 8-10 years rather than 5-6 years previously, which means they are far more likely to deliver a positive outcome for investors.

“This 10 year Review clearly illustrates why advisers and investors should be using structured products. It also shows where the sector’s fallibilities lay and how the structured product market has adapted and changed to provide better investments for investors.”

The Review is a supplement to a recently published in-depth Review of the sector covering the last decade by Lowes Financial Management.

* View the supplementary data and loss analysis click here

* Access the full Review of the Decade click here

Characteristics of loss making products:

  • Some of the loss-making products launched before the Financial crisis and so suffered from that event for various reasons, while three were restructured mid -term by the provider to protect against potential counterparty default, which led to a loss.
  • They used an American capital protection barrier rather than a European barrier, which meant if the index fell below a certain point during the investment period capital was lost. Had a European barrier been used, which is measured at the end of the investment, a loss would not have occurred with these products.
  • They used an alternative single index – such as the Euro Stoxx 50, or Nikkei 225 – and an American barrier.
  • They were linked to emerging market or oil indices.
  • They were share linked plans or linked to baskets of commodities.

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