Investment guide: structured products

Last updated: 03 Jun 2015

First published: 03 Jun 2015
Feature by Laura Whitcombe
Structured products can produce healthy returns but they're not for the faint-hearted.
It's not difficult to understand why some rate-starved savers are attracted to structured products.
They have long been marketed as providing a middle ground between the potential for
investment growth and capital protection.
However, while it's true that some structured products have handsomely rewarded investors (note
the use of the word 'investors' here and not 'savers'), these are complicated financial products and
should not be entered into lightly. Some are much more complicated than others and mis-selling
scandals over the past few years have meant the likes of Lloyds have stopped selling them.
That said, some investors swear by them. To help you decide whether they may be appropriate
for you, here's the Moneywise guide to structured products.

What are structured products?

There are three main types: structured deposits; capital protected products and 'capital at risk'
products.
1. Structured deposits can be thought of as a mixture of a traditional savings account and an
investment, providing a fixed return over a set period typically anything between three and six
years dependent on the performance of a specific stockmarket benchmark, often the FTSE 100
index.
The main difference with direct investments is that, even if the benchmark performs poorly, you
still get all your money back. Should anything go wrong with the companies that provide the
products, your money is covered by the Financial Services Compensation Scheme (FSCS) up to
85,000 per person, per institution just like money in a savings account.
2. Capital protected products aren't a million miles away from structured deposits. They're
designed to hopefully make a healthy return but give you back your original deposit should the
stockmarket perform poorly. Unlike structured deposits, however, your money is not protected
by the FSCS if the investment company were to go bust.
3. The raciest of the three are 'capital at risk' structured products. If the underlying benchmark
performs poorly, you will not get back the full deposit you originally invested.

However, most of these products come with a safeguard of sorts that protects the deposit should
the benchmark drop beyond a certain level which is often set at a drop of 50%, compared to its
starting level when the investment was sold. In such a situation, investors will lose some capital
but not all of it. They will usually lose it on a 1:1 basis so that if the underlying benchmark is
down by, say, 55%, then the investor will lose 55% of their capital (55 for every 100 invested).
Autocall, or 'kick out' plans have become popular among these riskier products, paying out a
defined return providing a certain trigger occurs - such as the index moving by a specified
amount. Should that happen, the plan comes to an end early and pays back the investor's capital
plus a return agreed at the outset.
If it doesn't happen, the plan keeps going on a yearly basis either until the trigger occurs or until
the plan reaches maturity. And if it does reach maturity, then the plan pays out the cumulative
return as well as the giving back the original capital invested.
What's the performance like?

While past performance is no indication of future performance, some structured products that
have matured recently have done so with healthy returns for their investors.
Data from CompareStructuredProducts.com shows that of the nearly 200 structured deposits and
capital- protected products that matured in the 12 months to 31 March 2015, the average
annualised return for all FTSE-100-only-linked products was 5.76%.
On average, they took just under five years to mature, a time in which the FTSE 100 recorded a
7.3% annual return, according to Morningstar. This means that had the investor put 10,000 of
their money directly in the stockmarket rather than the structured product, their investment
would have grown by 733 a year compared to 576. And the bottom 25% of products produced
returns of just 3.87% a year.
This is a common criticism of structured deposits and capital protected products; they only offer
investors a limited amount of the growth of the underlying index their money's invested in. That
said, they safeguard an investor's money from the ravages of falling stockmarkets, which, of
course, direct investments simply can't do. So the limited upside is in effect the premium the
investor must pay to insure their capital.
That said, some structured deposits have paid out high double-digit returns. Ian Lowes from
CompareStructuredProducts.com points out that the best-performing structured product that
matured in the year to 31 March 2015 was a capital protected plan provided by Morgan Stanley,
which matured after six years with an 85.8% gain.
However, Patrick Connolly, a chartered financial planner at Chase de Vere, urges investors not to
be blindsided by such high figures and warns of the downsides of structured products.

"In order to provide some degree of protection, most structured products cap returns and/or don't
allow investors to benefit from dividend payments."
He adds: "These products often have limited liquidity, meaning investors get hit with big
penalties if they want to access their money and charges are hidden so investors don't really
know how much they're paying."
This lack of transparency, he says, is a big issue. "These products are often complex with hidden
charges and risks and, quite simply, people shouldn't invest in products they don't understand."
There's also an argument to be made that structured products are expensive, especially if sold by
advisers who can charge advice fees each time a product 'kicks out' when an index falls or rises
too much or when the product reaches maturity.