When investing in structured products, don’t forget to diversify

Investing in just one or two structured products could be a serious mistake.

 When investing in structured products, don’t forget to diversify


This time last year, I wrote an article for this website that was headlined Why I don’t mind losing 32% on a structured product.

Whilst the headline wasn’t my words – to be fair, I’d rather not have lost anything, ever – the article explored why one poorly performing investment isn’t the end of the world when you have a diversified portfolio.

The investment that matured at a loss was one of the few structured products that lost money 2013 – of which I had two, the second maturing for a 13.8 per cent loss. Both of these were linked to the FTSE 100 and Japanese Nikkei 225 indices.

The Nikkei, together with most other stock markets around the world, fell dramatically as the banking credit crisis took its toll, and the devastating earthquake and tsunami that followed, with its inevitable consequences for the Japanese economy meant that the Nikkei 225 has taken longer to recover than many other world indices.

I didn’t lose too much sleep over the losses at the time, just reinvested the money and have seen positive growth since. But what really numbed the pain was the maturity this month of a third product with almost identical terms.

Third time lucky

The first investment, the one that produced the biggest loss, was taken out in January 2007, the second in September 2007 and the third in March 2008. As such, all three commenced before Lehman Brothers collapsed, but between the first and third investment the Nikkei had already lost around a quarter of its value.

The top of any market cycle is never apparent until after the event and my January 2007 investment was unfortunately made close to the top. As the market retraced, the subsequent investments were made with a view to recovering potentially lost ground.

By March 2008, I had two things in my favour. The most obvious was that I was investing at a much lower market position, and thus stood a greater chance of producing gains. But there was another positive factor. Because market volatility was higher by March 2008 and the correlation between the FTSE and Nikkei was lower, the structured product was deemed to be a riskier bet. It thus attracted a higher potential gain: 18 per cent for each year held, compared to 11 per cent for the product I took out in January 2007.

The strategy paid off. Whilst the first two products produced losses because the Japanese index did not recover all of its lost ground over their respective terms, the third matured producing a very welcome 108 per cent gain at the end of its six-year life.  

Benefit of hindsight

Obviously, had I known which way the markets were going to go and when, then I wouldn’t have invested in anything but the third contract. but when it comes to predicting stockmarket movements it’s been said that ‘there are those that don’t know and those than know they don’t know’. I fall into the latter camp, and try not to let emotion cloud my judgement.

It must be appreciated that the three investments ultimately transpired to be amongst the best and worst performing structured products that commenced in 2007 and 2008, but they were part of a broadly diversified portfolio which contained several other structured products (mainly FTSE 100 based) and numerous collective investments, which all serve to provide different returns in different market circumstances.  

READ MORE: The What Investment guide to structured products

There is much written and understood about collective investments and their performance but when it comes to structured products many investors and indeed advisers are still in the dark. The reality is that based on data compiled by CompareStructuredProducts.com the worst performing 25 per cent of structured products that have matured since January 2013 have on average returned at least the original capital and the other end of the scale, the top 25 per cent have produced very impressive gains averaging at 12.38 per cent per annum. Given that the vast majority of such investments protect capital against all but the most extreme circumstances, these figures are even more impressive.  

As my experience shows, it’s best not to consider structured products as one-off investments, but building blocks in portfolios which over the years can provide investors with greater certainty, producing pre-defined returns at set dates in the future. As I’m sure other regular investors in structured products will testify, once you have a steady flow of potential and fixed maturities coming through, a diversified structured product portfolio can be a great source of satisfying returns.

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