Structured Products - A Compelling Addition To An Investment Portfolio In Uncertain Times
Despite being existence in the UK since the early 1990s, Structured Products remain a relatively unknown investment vehicle to the wider retail investment consumer.
The past few years have been turbulent for financial markets due to various factors, including the COVID-19 pandemic, the cost-of-living crisis and continuing geopolitical tensions to list a few. Volatility is unsettling for many investors, and this leads them to seek investments which will help to avoid capital loss and / or sharp downward movements in values. We believe that Structured Products can address these concerns and can play a part in constructing a balanced portfolio.
In this article, we aim to provide an overview of the different types of products, potential benefits and risks to help those who may be considering a Structured Product investment for the first time and a reminder for those who have invested previously.
What Are Structured Products?
There are 2 types of Structured Product:
1. Structured Deposit Plans
Structured Deposit Plans are similar to fixed-term deposit accounts and offer the potential for attractive returns which are typically higher than traditional cash deposits. Instead of interest being earned at a set rate, the return is fixed but depends on the performance of the underlying asset or index, such as the FTSE 100 Index. Structured Deposits are designed to return the investor’s capital in full at maturity as a minimum, provided funds are held for the entire fixed term. They usually benefit from FSCS protection of £85,000 per person for eligible investors, meaning full investor protection up to this amount in the unlikely event of counterparty failure.
2. Structured Investment Plans
Structured Investment Plans are generally referred to as capital-at-risk investment contracts which typically offer higher returns than Structured Deposit Plans and similarly, these returns are dependent on the performance of the underlying asset or index. With this type of Structured Product, you could lose money if the underlying stock market index fails to perform or if the issuing counterparty fails. However, there are various types of Structured Investment Plan that include an element of capital protection. It should be noted that counterparty failures are extremely rare, and we provide access to up-to-date credit ratings on these institutions to help investors make informed decisions.
Structured Investment Plans often include barriers as a way of reducing risk. The basic principle is that capital invested is only at risk once that barrier has been breached and these barriers may be measured at the end of the term or during the term of the investment, depending on the terms of the plan. For example, if a plan has a barrier of 65%, then the original capital will be protected, provided the value of the underlying index or asset does not fall below 65% of the opening value or strike price at the start of the plan.
Why You Should Consider Investing In Structured Products
Firstly, what are investors most focused on? We believe that primarily, this will be avoiding capital loss and / or sharp downward movements in their portfolio values. This a typical human behavioural trait, with many investors spending more emotional energy on their anxieties when markets and investment values fall, than on the happiness gained when they rise. However, this kind of behaviour has led to many investors losing composure required for successful investing and panicking by selling investments too early then missing out on future recoveries and gains.
Secondly, why are Structured Products not used more, when they have historically continued to deliver positive outcomes for investors and also in 2024? The evidence in favour of more mainstream use of Structured Products is illustrated by the following headline data*:
- Over 98% of maturing plans delivered a positive outcome for investors in 2024.
- The average annualised return for all maturing capital at risk plans was 7.49% over an average term of 2.81 years Only 0.95% of maturities realised a capital loss in 2023, compared to 1.36% for the five-year average.
- Just 2 capital at risk plans realised a loss for investors in 2024, both of which were Non FTSE 100 trades and designed to benefit only in falling markets.
- FTSE 100 Plans have not suffered a loss since when they started back in 2003.
*Source: IDAD Limited
Another key benefit of Structured Products is that they may be invested using tax wrappers, including an Individual Savings Account (ISA); Self Invested Personal Pension (SIPP) and Small Self-Administered Scheme (SSAS), meaning that tax-free gains can be achieved.
In Summary
The ‘normalisation’ of interest rates in the last 2 years or so compared with historic levels, has led to even more attractive capital protected opportunities for investors. Lots of people keep money in bank and building society accounts because their primary objective is simply not to lose their hard-earned savings – they’re more worried about return of capital rather than return on capital. For example, investors suffered when bond valuations collapsed as interest rates rose sharply following the September 2022 mini budget, leading to very poor performance by traditional lower-risk portfolios which are likely to have held a significant proportion of investments in bonds. Investors in Structured Products were able to avoid the risks and volatility seen during this period due to the nature of their design.
Based on the data above and the likelihood of falling interest rates in the short to medium term, we believe that there is a strong argument in favour of the use of Structured Products as an alternative to cash-based alternatives such as bank & building society accounts and fixed rate bonds. By dealing with an established financial adviser, who is experienced in the Structured Products market, adding value by selecting the most appropriate plans which achieve market leading performance is achievable.
Get In Touch Today
At Best Advice Wealth Management, we are regulated by the FCA and very active in arranging Structured Products. We have a long track record of delivering excellent returns for our clients in doing so. We believe that Structured Products provide an opportunity to make a compelling addition to a modern, balanced, risk-managed portfolio.
- Structured Products are simple to arrange on an advised or non-advised basis, depending on the provider’s requirements and your own needs, knowledge and experience.
- We offer a full range of available products through all the main UK providers and plans are suitable for both private and corporate investment.
- We believe that our set-up fees are the lowest in the UK.
For further details and individual plans currently available, click here to visit our dedicated page
To find out more about Structured Products please get in touch and we’ll be happy to guide you through the various options.