Structured investments beat bonds and cash, new research shows

Capital-at-risk structured products maturing in the last five years have delivered a better total return than both bonds and cash, according to a study from StructuredProductReview.com.

 Structured investments beat bonds and cash, new research shows


 

Structured deposits, which do not put investors’ capital at risk, have beaten cash deposits but not bonds over the same period, the study further showed.

But UK equities have been the best-performing asset class, beating bonds, cash, and both kinds of structured products.

This spread of returns is exactly what one would expect, with the riskier asset classes delivering higher returns over a period of several years, according to Thomas Hughes, part of the structured products team at Lowes Financial Management which carried out the research.

Ian Lowes, managing director of Lowes Financial Management, noted that negative sentiment around structured products remains in the mainstream media and among some advisers. But he hoped that the publication by Lowes of what he called the first comprehensive review of structured product performance would encourage people to open their minds.

He highlighted that one of the myths which exists regarding structured products is that the private investor is purchasing a ‘derivative’. Lowes said that in reality an investor is entering a legal contract with the creator of the structured product, which obliges that company to pay the investor the advertised returns unless the institution backing the product (the counterparty) goes bust. The latter may be entering the derivative market but the private investor is not. 

More than 75 per cent of the structured products market in the UK is composed of products whose returns are linked to the FTSE 100, and in the past decade, less than 1 per cent of those products have delivered a loss of capital to the investor, according to Lowes. 

Lowes added that the transparency of structured products has ‘advanced dramatically’ in the past five years, but that wider investment sentiment has not adjusted to take account of this. 

The research into structured product performance looked at products linked to the FTSE 100 that have matured since 1 November 2008. The total return provided by these products was annualised, averaged out, and compared to the performance of cash (represented by three-month Libor), bonds (iBoxx Sterling Corporate 1-5 years) and equities (HSBC FTSE 100 Tracker) over the same periods.

The study found that structured deposits had produced an average annual return of more than 3 per cent, while structured investments, which put capital at risk, had returned about 8 per cent.

To download a free guide to structured products designed for the private investor, click here.

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