Gambling on high returns
SO-CALLED structured products offering investors higher returns than cash, but with less risk than shares, have fallen out of favour over the last decade, but they still have advocates.
Savers got cold feet after the scandal affecting an earlier type of structured product, known as “precipice bonds”, sold in the 1990s.
Structured products can pay between 5 and 8 per cent a year but in some cases your capital is at risk. Should you consider them?
CAPITAL QUESTION
Ian Lowes, managing director of Lowes Financial Management, is a long-standing advocate, describing structured products as “one of the best, consistent performing, but unloved investment sectors”.
Your return is often linked to performance of a stock market index. If that rises over an investment term, you could make a handsome profit, but if it has fallen by more than say 40 per cent when your product matures, you lose 40 per cent of your capital.
Lowes said the best plans are
“autocalls” which have multiple potential maturity dates, so if the market is down the product runs on. “Your return snowballs the longer the plan is in force.”
In the last 10 years, Lowes said 1,500 investment-based “autocall” plans matured with an average annualised return of 8.52 per cent: “Of these, 1,449 made a gain and only 23 made a loss.”
Deposit-based autocall plans are less risky as these safeguard your capital and give you Financial Services Compensation Scheme (FSCS) protection if the underlying bank fails.
The 93 FTSE 100-linked autocall deposits that have matured to date have returned 5.23 per cent a year on average and none matured at a loss.
Lowes advises seeking independent financial advice before investing.
STRUCTURED RISK
Damien Fahy, founder of website MoneyToTheMasses.com, said “capital at risk products” are only really suitable for sophisticated investors: “Structured products are complicated and expensive, and the charges are often rolled into the terms of the contract.”
Structured deposits backed by the FSCS are safer, but Fahy suggests a cheaper, more flexible way of limiting risk: “Put most of your money in a cash Isa and a small bit in a FTSE 100 tracker.That way you risk relatively little and have transparency on costs.”
Chase deVere chartered financial planner Patrick Connolly said structured product risks can be difficult to evaluate and you cannot always access your money during the term without penalty: “Performance is linked to the stock market, which has been going strong for a decade. If we have more challenging times ahead, investors could lose money.”
He does not recommend the products: “We have not found any that are clear and transparent enough for clients to fully understand.”
Darius McDermott, Chelsea Financial Services director, said:“It is important to read the small print, of which there can be a great deal. Few private investors buy such things and I think that is right.”