Happy with another 50% gain from a structured product

As a financial adviser who puts client money where he would put his own, I invest in a fair number of structured products myself.

 Happy with another 50% gain from a structured product


As a financial adviser who puts client money where he would put his own, I invest in a fair number of structured products myself.

I’ve just had another plan mature, the Morgan Stanley FTSE Kick-Out Growth Plan, which matured on its third anniversary with a full return of capital and a 50 per cent gain.

This stellar return was a certainty as long as the FTSE 100 was above 5,853 at close of the market on 8 September. It’s been above that level since the beginning of January last year, so I’ve been sitting pretty comfortably since then. If the index had been below this level, the investment would have continued for another three years. If the plan had continued to that point, it offered 1.5 times the rise in the index with no upper limit on the gain.

Given that I was assured of at least a return of capital at the final maturity date unless Morgan Stanley went bust or the FTSE had dropped 50 per cent below its initial level (ie to less than 2659 points) I think this was a pretty good investment.‎ The return of the Morgan Stanley plan outperformed the total return of the FTSE 100, which delivered 43.51 per cent.

A justification for not using structured products from vociferous critics is that the return does not include dividends, which you would get in the return of an index fund. Here the structured product returns outperformed the index’s total return, including dividends. A HSBC FTSE 100 tracker’s total return over the same period was 42.67 per cent. 

This latest structured product maturity is Issue 12 of the plan, but the 13th one in my ISA will mature at the end of October if the FTSE is above 6,109. I could sell out today banking a 52 per cent gain, but given that the October maturity will produce £1.55 for every £1 invested, I think I’ll hang on.

Let’s consider what could have gone wrong. One scenario is six years later after the start of each investment I could get my capital back with no gain. This would happen if the FTSE was down over the six-year period, but hadn’t lost more than half its value. The bank behind the ‎products could go bust and without any of the protection afforded by the Financial Services Compensation Scheme on my structured deposits, I could lose all the money exposed to each bank. And if the FTSE did end the six year term more than 50 per cent below the level recorded at the start of the term my investment would track the exact same percentage fall in the index. I’m happy to accept these risks given their likelihood and the potential rewards.

These are just two of a number of products that I have maturing this year and given the buoyant market conditions, it’s not surprising that they are making such attractive gains. There’s something rather pleasurable about that. But will such positive market gains last?

There has been fear there could be a market correction at some point and investors may feel reluctant to buy into any market-linked solution when the index is high. Luckily we have seen slightly improving terms of structured products due to improving market conditions for pricing, which we expect to continue. However, the benefit of downside protection of structured products should also be remembered.

Various providers have been launching defensive structured products, which offer the potential for a gain even if the index is, say, 10 per cent below its initial level. The benefits of investing in such a product against a traditional index fund, which will always track the fall in the index, are clear.

Societe Generale for example has recently launched a range of ‘step-down’ kick-out plans, which offer the opportunity to mature at a reducing reference level of the initial index level. This means in plain English that your investment could mature with a gain even if the index is down.

The SocGen plans also spread the risk of a bank default by using four financial institutions as counterparties – so if credit risk is a concern for you, this type of structure might be appealing.

Structured products are constructed in various shapes and sizes and so there are likely to be appropriate investments out there for you. I hope this latest maturity serves as a reminder of the benefits structured products can offer, but remember nothing is risk free and if you have any doubts about the suitability of any particular course of action always seek independent financial advice.

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