Janine Starks
Head of Investment Solutions
Liontamer
Our real interests at Liontamer lie firmly in the design of investments which are tailor-made for the New Zealand market. But Structured Products are like any other industry - it always pays to know what's going on in the world. It's even more helpful if you keep an eye on a market which is broadly similar to your own. That's why we like to keep a pretty close watch on our friends in 'Old Blighty'.
The UK Structured Products market is intensely competitive and remarkable for its level of both depth and breadth. Now that we're 6 months into the calendar year, this halfway point is often a good marker in terms of reviewing activity and looking for shifts in sentiment and trends.
Conditions in the world of UK retail finance have been 'challenging' to say the least. Providers and financial planners are struggling with a huge loss in investor confidence and finding clients willing to invest new money into equities is becoming more and more difficult. However, Structured Products are bucking the trend - significantly.
During 2002, sales of structured products in the UK reached NZ$17.2bn and providers launched 306 products into the market. In the first 6 months of 2003, sales have already reached NZ$11.1bn (65% of last years figures achieved in a 6 month period). In terms of products numbers, 294 products have been launched (96% of last year's volume in a 6 month period).
The trend is clear; products offering capital protection are continuing to grow in popularity with both financial planners and investors. They are the main source of new business for financial advisers.
A fair question to ask is whether these products are simply growing in popularity because of the fear and uncertainty which exists in the equities market. Do these products suffer and sales volumes decline when markets are rising? The answer is in fact 'no'. Capital Protected products have proven themselves to be ever-green. Looking at figures from the UK during the 1990's, the market experienced year on year growth of almost 35% p.a. Right through the bull markets when many investors were criticised for having 'blind faith', capital protected products were charging ahead and sales volumes were increasing in leaps and bounds. Proof that no matter how certain market growth may seem and no matter what point in the market cycle we are at, many financial planners and investors have had the foresight to build protection into their portfolios.
Other trends which have emerged in the first half of the year concern the type of product and the underlying asset to which it's linked.
Firstly, product type. Both growth and income products exist in the UK, but growth products now dominate. In the last 6 months this trend has sharpened - to the point where at times, 100% of available products have been growth orientated. This has much to do with the pricing constraints currently affecting the UK income market, but it also has a lot to do with the benefits and innovation which has occurred in the growth market. Financial planners are now using growth products to build in some certainty of recovery into clients' portfolios and underpin losses.
Secondly the trend towards using the FTSE 100 Index as the asset which underlies a capital protected product, is really cementing itself. Single indices are very simple to understand and are far more heavily supported by both financial planners and investors. It has now got to the point where 75% of all products issued are against the FTSE 100 and 80% of products are single index.
In the monthly review of the market by www.StructuredRetailProducts.com, (June 2003) Dr Robert Benson, founder of the site comments:
"A key factor in continuing to grow the market would seem now to be the ability of product providers to educate both investors and their advisers on the benefits that structured products can provide. Specifically, providers need to focus on explaining the ways in which products can satisfy particular customer needs rather than developing new and more complex payoff types. Whilst effort on the latter is important, a maturing market needs to understand the role that even the simplest structured product can play in providing a return that matches clients' needs."
With kind thanks to www.StructuredRetailProducts.com for information and figures
