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Nick Sketch slams expensive and overly complex structured products
by Emma Dunkley on Apr 24, 2013 at 12:02
Nick Sketch, senior investment director at Investec Wealth & Investment (pictured below), explains how investors can gain access to Europe with downside protection, and play UK dividends through structured products.
What are some of the most interesting products you have seen recently?
Over the past few months I have seen lots of new FTSE autocalls issued, and these have been needed to replace existing products that have been repaid. However, equities are higher, credit spreads are narrower and volatility is right down. This means prospective returns are a lot lower than they were a year or two ago.
Some investors have responded by keeping their return targets up and increasing risk tolerance. This is sometimes done by raising the final barriers, or by using a less robust credit or by basing returns on the ‘worst of’ two indices.
What are some of the risks involved?
Apart from anything else, ‘worst of’ structured products effectively mean that investors are selling volatility and buying the correlation between the two indices.
Although terms for the latter have improved recently in some areas as correlation has fallen a little, investors are generally still not getting great value for taking a bit more risk.
Value for money plus risk awareness means other investors are casting the net more widely. Rather than replacing a lower risk holding with a new autocall, some are opting to move that money away from structured products for now.
Instead, it can make more sense to use your structured products allocation to replace part of a portfolio’s equity exposure by buying a participation product.
Taking HSBC as a high quality example, you can buy a structured product today with soft protection in six years 40% below today’s market level, which also offers 200% of the capital increase in the S&P 500 index.
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