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Share-based structured products – far from a basket case

10 May 2017

Investors have been wary of investing in structured products that use the performance of a basket of shares to generate returns, preferring those using an index or indices, but is that wariness warranted? Chris Raine of looks at the performance facts.

After another impressive year of maturities for structured products, it would be easy to close the book on 2016. However, to encourage continued progress within the sector, identifying the common features of some less successful plans could be beneficial. Despite FTSE 100-only linked maturities returning at least investors’ original capital on every occasion throughout 2016, there were a small proportion of structured products that returned a loss, many of which utilised baskets of shares as their underlying measurement. We take a look at some of the culprits responsible for holding sector performance back in 2016.

Share-linked structured products are typically linked to a basket of shares, often requiring most, if not all of them to perform above predetermined levels in order to achieve a gain on the invested capital. However, if the value of one or more of the underlying measurements starts to drop significantly, any loss to invested capital is very often determined by the worst performing share on given dates.

2016 performance

Analysing the 2016 performance, we can see there were 15 maturities for share-linked structured products, with two of those plans leading to a loss to invested capital and two plans returning capital only. The average annualised return for the 15 maturities was a reasonable 7.01% over an average term of 3 years and 2 months. But it’s when we analyse the range of returns, we see the extremes, with the two loss-returning plans generating annualised losses of 13% and 17.92% in contrast to the top two plans which returned annualised gains of 14.42% and 18.64%.

When we compare the above to the capital at risk FTSE 100-only linked maturities, of which there were 205, the average annualised returns are slightly lower at 6.81% over an average term of 4 years and 3 weeks. However, the disparity in performance is clear, with the top 25% of plans returning an average annualised gain of 9.54% and the bottom 25% of plans returning a still, quite respectable average annualised gain of 4.18%.

The worst performing share-linked plan returned only 37.22% of investors’ original capital. The plan in question was the Meteor FTSE 5 Quarterly Kick-Out Plan, which struck on 24 June 2011. A positive return required the 5 shares in the basket (BHP Billiton, GlaxoSmithKline, HSBC, Royal Dutch Shell – Class A and Tesco) to be above 95% of their initial levels. But with a 62.78% drop in BHP Billiton share price (from 2300.50 to 856.30), the result was an equivalent percentage loss to original investors’ capital. The outcome highlights the risk involved with a basket of shares, especially when it takes just one of those shares to underperform to lead to a loss.

Historical performance

Using our own maturity data of capital-at-risk products from the 6-years leading up to March 2017, we can see that 58 share-linked plans have matured, producing a wide range of returns. The average annualised return was 10.73% over an average term of 2 years and 5 months, with 47 plans producing a gain and three plans returning capital only and eight giving rise to a loss. The top 25% of plans produced average annualised returns of 19.00% whereas for the bottom 25% that figure is -2.85%.

Looking at the same 6-year period for FTSE 100-only capital-at-risk maturities, of which there were 973, these generated more consistently positive returns, with only 1 plan losing capital. The average annualised return was 7.88% over an average term of 3 years and 4 months. The top 25% of plans returning 11.62% per year on average, while the bottom 25% of plans returning an average annual gain of 4.62%, a much narrower range of results in comparison to share-linked maturities.

One to watch

One example of the impressive returns a share-linked plan could offer is the ‘Gilliat 3 Stock Dual Option Kick Out Plan June 2014 – Option 2’, which has the potential to more than double investors’ capital after three years. This investment, next observed on 4 July 2017, requires the share prices of GlaxoSmithKline, Vodafone and Barclays to finish at or above their initial level, at which point the plan will return 34.5% for each year it has been in force.

Figure 2 shows the share prices over the duration of Gilliat 3 Stock Dual Option Kick Out Plan June 2014 – Option 2, of which all will need to be at or above their initial levels in July in order to mature early with a gain of 103.5%. From the latest share prices we can see that, at this stage, it’s very difficult to predict whether an early maturity is likely on the next observation, with two shares narrowly above their initial levels and one slightly below. The green line also illustrates the bid price of the plan, which can be used to monitor the ‘value’ each working day throughout the term. If the plan does not mature in July, there are 3 further annual observation dates, which could result in an increasingly positive maturity. Final determination, if the plan has not matured sooner, is on 5 August 2020.

Looking forward

From our maturity data, it’s easy to find repeat offenders when we look at the individual shares causing plans to return a loss. The same shares, however, can be the reason that a different plan goes on to make positive returns at a later date. Three shares that had a turbulent 2016 were BHP Billiton, Standard Chartered and Tesco. The following three graphs illustrate the historical share prices for each and the barrier levels for future maturities. With two of the three shares rising significantly over the last 12 months and Tesco only falling slightly, the main culprits for losses to investors’ capital in 2016 look in a stronger position for 2017 maturities.

Going forward there are still 136 share-linked plans left to mature, which looking at past performance, could have a mixed impact on the sector. However, as we can see with the likes of the Gilliat 3 stock plan, there is still potential for very positive returns. Despite share-linked plans becoming rare, it could be argued that, with a certain attitude to risk and appropriate investment objectives, there is still a place in the market for some variations.


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