What's the best route to incorporating structured products into a portfolio?

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Is it better to access structured deposits directly or through a fund?

 

At a time when stock and bond markets are fraught with risk, structured products are an option worth considering. Traditionally, they have divided opinion but when the risks are properly understood, they can be important tools for investors seeking capital protection and more predictable returns, especially if you’re looking for an alternative to absolute return funds. FE Analytics’ data shows that the absolute return funds sector lost 2.9% during 2018 and just 15 of the sector funds delivered a positive return to investors last year¹. While other data from FE Analytics shows the average fund in the IA Total Return sector lost 2.2 per cent over the past 12 months to March 7.²
 

With growing concern about the economic outlook, VitalityInvest decided to launch two Protector Funds in January for clients with medium-low risk appetite, both invested in structured deposits. The funds aim to meet clients’ need for capital protection, while retaining the potential for investment growth.

 

Traditionally, most investors have accessed structures directly via the issuer. However, we believe that for advisers and their clients, there are several advantages of investing in structured products via a fund.

 

Flexibility

When buying direct from an issuer a minimum investment amount usually applies. With a fund no such minimums apply. Rather, there will be a minimum amount that must be invested across all funds, which includes both structured products and other asset classes. For a client or adviser looking to invest in structured products as part of a diversified portfolio, this may appeal. Additionally, it is worth considering that with an ISA, an investor is limited to investing with a single provider in a given tax year. By investing in structured products through a fund offered by an ISA provider, it is possible to combine this with other investment types and managers offered by the provider, which gives greater flexibility.

 

According to the UK Structured Product Association’s January 2010 report³: “Structured products are often considered as stand-alone investments and compared as direct alternatives to for example cash, equities or corporate bond funds. Structured products work best when used in conjunction with other investments where the defined returns and capital protection can be used to balance, perhaps, higher risk unprotected equity strategies or in lower risk portfolios to offer better than cash returns without risking capital.”

 

Opportunity

Within a fund, structured products also offer access to markets that enables the portfolio to build diversification while limiting the risk. The UK Structured Product Association’s report (2010) explains this as follows: “In sophisticated portfolios structured products can also offer investors access to other assets or markets such as commodities or emerging economies with capital protection where investors can benefit in any uplift without directly buying into the market. This creates asset diversification into potentially volatile markets without necessarily increasing risk to capital.”

 

Another consideration, which is especially true with the VitalityInvest funds, is that investing through a fund means the investor may be eligible for enhancements offered by the provider. With Vitality this means if a customer stays invested in the ISA, Junior ISA or Retirement Plan, they will receive added boosts to their savings pot every five years. They can also potentially gain from the wellbeing rewards and lower fees that come from engaging in the Vitality Healthy Living Programme. The healthier a client’s habits, the more Vitality points they earn, which contributes to their Vitality status – Bronze, Silver, Gold and ultimately, Platinum. This is something that isn’t available when buying these structured products directly.

 

Simplicity

The investment process is facilitated by the fund provider when buying via a fund, but when buying direct the investor needs to open up a facility with the counterparty. The latter can be a fairly cumbersome and lengthy process. In contrast, in the case of a fund, investing in structures can be as simple as processing a transfer of assets from another fund already held with the provider.

 

The market is evolving and some providers are starting to offer structured products from selected issuers but the expertise in the market is still limited. For those unsure of the right process a fund provides a low-risk way to access these products.

 

We believe that structured products provide an excellent investment opportunity and offer great diversification relative to “traditional” asset classes. For those investors convinced of the benefits, these are easily accessed through using a fund. The time is right for structured products and we expect to see much more innovation in this market to make products more accessible for advisers in the near future. For now, the simplest route to market in a diversified portfolio is through a fund.

Sources

1. https://www.professionaladviser.com/professional-adviser/opinion/3072750/ian-lowes-can-structured-products-deliver-where-absolute-return-hasnt
2. https://www.ftadviser.com/investments/2019/03/07/investors-flee-absolute-return-funds/
3. https://spresources.co.uk/spr/resources/10mythsaboutstructuredproducts.pdf

VitalityInvest is a trading name of Vitality Corporate Services Limited. Vitality Corporate Services Limited is authorised and regulated by the Financial Conduct Authority.