Investors have taken some blows during the pandemic and financial turmoil of 2020, a new UK report reveals.
People who invested in structured financial products in recent years have probably seen one of the worst performances and returns in maturities since the aftermath of the financial crash of 2008/9.
Market turmoil resulted in 16 among 235 structured product maturities in 2020 realising a capital loss. This compares against four loss-making maturities among 334 maturities in 2019. Average annualised returns for all 2020 maturities, including deposits were 3.52 per cent against 5.73 per cent in 2019 and 6.37 per cent in 2018.
The latest analysis is featured in the Structured Products Annual Performance Review 2021, produced by Lowes Financial Management, a leading UK financial adviser. The report provides a comprehensive overview of all UK retail structured product maturities throughout the preceding calendar year. It provides an independent summary of best and worst performing products.
Structured products have existed for around 30 years but remain a niche investment vehicle. These fixed-term products are market-linked and can be highly tailored, with some more risky than others.
Ian Lowes, MD of Lowes, says: “There’s no denying that coronavirus and its worldwide socioeconomic impacts have been colossal. The UK stock market has been in turmoil throughout the year and few investments have been immune to the dramatic turbulence.
“Notwithstanding the exceptional performance of the structured products sector in recent years, 2020 still represented another successful year for retail structured products. Almost 70 per cent of all products maturing last year generated positive returns for investors; fewer than 7 per cent returned a loss. The rest simply returned investor capital, having protected it from the fall in the market.”
Sector annualised returns may have dropped on recent years and against the 6.27 per cent average of the last decade (Jan 2010 – Dec 2019), but they remained inflation-beating. While there were some products that resulted in a capital loss, this still represented less than 7 per cent of the overall market.
Lowes says: “All of these maturities that made a loss were inherently riskier share or commodities linked plans, many of which were already forecast to make losses even before the pandemic struck.”
Lowes, which has frequently been recognised as amongst the best UK investment advisers in various national awards, has become one of only a few specialists in the structured products sector. As well as analysing the performance of all structured products and data covering more than 8,000 plans, Lowes has its own process for identifying ‘Preferred’ plans.
The Lowes ‘Preferred’ maturities (55 out of a total of 235) plans outperformed their respective sub-sector averages in most instances with an average annualised return of 4.44 per cent across an average 5.3 years. None of the 16 loss-making plans that matured in 2020 were granted Lowes ‘Preferred’ status.
Lowes adds: “We are delighted with the inflation-beating performance of our ‘Preferred’ plans. The average return of the top quartile of those ‘Preferred’ plans was 9.57 per cent.
“More generally, the structured products sector continues to evolve and develop. The sector is well regulated, has become a lot less complex, and many plans regularly outperform other investment products, while providing contingent capital protection against market falls. They can no longer be dismissed by any independent investment adviser.”
During 2020 there were 11 plans that matured realising an annual return greater than 10 per cent. More than half the rest delivered an average annualised return of more than 4 per cent, easily beating inflation.
Half of all maturities in 2020 were linked solely to the FTSE 100 Index. Of these the deposit and capital protected structures returned an average annualised return of 1.82 per cent over an average duration of 5.35 years and the capital at risk plans returned an average of 5.68 per cent over an average duration of 4.24 years.
The best performing plan was the Hilbert Investment Solutions Kick Out Series: 3 Stock Defensive Autocall Issue 1, which matured returning investors’ original capital in addition to a gain of more than 10 per cent after just six months.
The worst performing plan was Meteor’s Crude Oil Kick Out Supertracker Plan March 2015. This plan matured at the end of five years with an annual capital loss of 74.89 per cent, making an annualised loss of 24.12 per cent.