Presentation on theme: "Structured Products Delivering in Troubled Times"— Presentation transcript:
1Structured Products Delivering in Troubled Times Clive MooreManaging DirectorInvestment Design and Distribution
2Investment Design and Distribution Established 2002Consultancy with banksPrivate Client ManagersFund of Fund ManagersFamily OfficesSome InternationalInternationalPrincipal Focus since 2008
3Objectives Learn about the history of Structured Products Develop an understanding of how structured products workWhy they continue to deliver market- beating returns.
4Warning!! The following may make your head hurt a little Don’t panic – you can get copies if you’re interestedAsk questions as we goIt won’t take longMost people remember some of itIt’s actually easier than most people think
5What is a Structured Product? An investment that delivers returns in a different way to direct investment in the underlying asset.Generating higher income instead of capital growthProviding capital protection on ‘higher potential’ asset classesEnhancing returns from modest market gainsBacking investment views in a concentrated wayAccessing hard-to-buy asset classes
6Investor Attitude Rate Fixation Legacy of Building Society retail funding requirement – they had to get so much money from retail investors before they could borrow any institutionally – so heavy rate competition (different to most other countries).Short TermismBritish are eternal financial optimists, a better “rate” is just around the corner, so don’t like to “tie-up” their money too long.Like to buy products they think they understand, rather than take advice – poor image of financial advisers, reluctance to discuss personal finances.
7Popularity of Structured Products Short and defined termOften promoted with a “headline” rateGood value (normally half the price of OEIC/UT)Passive investment (not paying to underperform)Variety of structures to suit particular needsTerms are fixed at outsetGenerally easy to understand and evaluateDeliver returns in sideways markets
8Massive Popularity with Wealthy Clients Capital preservation is paramountPreserve hard earned capitalDeliver easy to understand payoffs to investors who aren’t that interested in their portfoliosClients looking for ‘cash plus’ returnAbility to deliver tailored solution for client needsFocus on absolute return to retain client relationship
9Counterparty Collapse Banks took on too much riskManagement focussed on sales – retail background led to desire to sell more loans (tins of beans) without credit considerations.Counterparty issue hadn’t been clearly presented or understoodNothing is risk-freeAdvisers should pay attention and cover their rears!If it looks too good to be true…
10The Component Parts “Cash” Call options Put options Medium Term Notes/Zero Coupon Bonds. Debt issued by banks. Just like corporate bonds. Options normally embedded in the MTN. Counterparty issue!Call optionsThe right (but not the obligation) to buy something at a predetermined price at a point in the future.For example, the right to “buy” the FTSE 100 at 6000 points in 5 years time.Put optionsThe right to sell something at a predetermined price at a point in the future.For example, the right to “sell” the FTSE Index at 6000 points in 5 years time.Option normally embedded in structure.
11Constructing Structured Products Simple Growth Product:100p received from Investor: What gearing can be afforded?Total margin of 5p to cover commission, marketing costs etc.6 year Zero costs 83p (6 year interest rates at 3.2%)Leaves = 12p to buy FTSE upside6 year FTSE Call option costing 20pGearing that can be offered = 12/20 = 60%
12Building Blocks Simple Cash + Call E.G. Full capital return plus 60% FTSE growthPossible Bonus100%100%Call Options100% Capital ReturnChargesCash (MTNs)Provides CapitalReturn
13Constructing Structured Products Income Plan:100p received from Investor: What income can be afforded?Total margin of 5p to cover commission, marketing costs etc.5 year Zero costs 85.5p1% income for 5 years costs 4.6pSo annual income of 7% costs 32.2pSo cost is 122.7p!Sell 5 year FTSE 100 Put Option = 22.7p (lose 1:1 at maturity if Index ever below 50% of start value)
14Building Blocks Cash minus Put E.G. 7% income each year, but lose 1 for 1 if Index lowerVariable CapitalReturnMax 100%Put Option Premium100%ChargesMax 100%Cash (MTNs)Provides CapitalReturn and Income5 x 7% Income
15Features Capital Protection Early Kick-Outs ‘Soft’ protection – as long as the worst Index has never been below 50% of its start value.Check barrier level – is 60% a 40% drop or 60% drop?American option = below 50% at any point.European option = below 50% at maturity.Early Kick-OutsEarly maturity with bonus if certain levels achieved.Auto-call products, single or multiple underlying.Coupon Counter/Podium payoff – income/growth hybrid.
16Features Stock Baskets Counterparty Risk Always Ask Returns linked to a basket of stocks/indices/commodities can give more diversification.Remember, single shares can collapse completely, but indices never die – they just change constituents.Counterparty Risk‘Riskier’ banks will pay higher returns (better looking products, wider margins).Think of your excuse in case things go wrong.Always ask – you should always be told.Always AskWhy is it different to everything else?Make sure you understand the payoff in different scenarios.Complexity may not be a bad thing, but check.
17Why the Bad Reputation Bad news makes a good headline. Compensation culture – everyone’s a victim if there’s money in it.PR from “vested interest groups” – Threat to traditional funds.“I thought it was guaranteed” - Well pay attention can’t you read!Execution only salesShould have spoken to an adviser, or bought a product you understood!Products “sexed up” to look better than they were.Counterparty issue not clearly highlighted.Some providers too greedy – Inappropriate counterparties used.
18Investor Emotion Index Annual ReturnEmotion>12%Mildly enthusiastic+9%Neutral+3%Surly (worse than cash)0%Relieved if markets down-5%Positively hopping mad<-7%MurderousGood to outperform, but better not to underperform
19Investment Backdrop Developed equity markets lagging – particularly UK Changes in capitalismShares were owned by people with a vested interest in their long term performance (company pension funds etc.)Shares now owned by Fund Managers – interest only in relative performanceFund manager income from stock-lending (which also encourages downward speculation)Focus on attracting new investments.10 year FTSE flat – CEO remuneration up 400%*!!Too many snouts in the trough.*Source Manifest MM&K
2010 Year Fund Performance Total number of funds 18,154 Funds with 10 year record4,217 (23%)10 year growth greater than 5% p.a.2,047 (11%)10 year growth greater than 10% p.a.676 (4%)Source: Morningstar 16th September 2011
21Simplicity Leads to Success Product should be understandable in 2 paragraphsRemember, most investors are used to building society savings accountsBest to use recognisable underlyingsEveryone likes a headline rate
22The IDAD Difference How have the IDAD notes performed so far? Year of IssueAutocalls Issued (GBP, USD, Euro)Matured By First AnniversaryAnnualised Return exceeded indexOngoing > year 1 since issuanceOngoing < year 1 since issuance2008320091615612010402517114201159
23Structured Products Delivering in Troubled Times Details of our current offers are available on our website –Or contact our IDAD Sales contactOr
24Structured Products Delivering in Troubled Times Clive MooreManaging DirectorInvestment Design and Distribution