Positive returns in negative markets, is it possible?

The current market climate is volatile. Equity market returns over the past year are close to zero, with any gains in 2021 lost over December and January. So, how are we able to generate returns of over 7% for our clients when faced with high market volatility?

Structured Products

AWM are well versed in the research and advice of Structured Products. At the most basic level, these contracts derive their returns from prescribed conditions on an underlying asset or index  (such as the FTSE 100). At present, plans are available with up to 13.25% return per annum and products that generate a return even if the underlying falls by up to 40%. This can all be attained while having complete capital protection (up to £85,000 per counterparty) if investing in a deposit plan.

Who Will Benefit?

2 popular types of clients who would benefit from Structured Products are those in retirement (or nearing retirement) and high-net worth clients. A large reason for this is the degree of market protection offered in the plans. There are currently plans on offer that require the market to fall by more than 40% at the end of the contract before your capital is at risk due to market movements. As a result, clients can be more certain about the value of their portfolio in this volatile environment.

What Are The Different options?

Structured products either pay out their returns based on the value of the contract at certain dates (capital growth) or as income throughout the plan. Income plans are particularly popular with retirees. Unlike annuities, income plans allow retirees the possibility to receive an income while retaining the benefit of maintaining the capital value of their accumulated pension. While capital growth plans tend to have higher return potential and are therefore popular with clients who have utilised all of their annual allowances due to the differences in taxation.

Plans can either pay out returns at the end of the contract or mature early (Kick-Out). Kick out plans tend to be the most popular type of plan as they are the most likely product to generate a return. This is because they have opportunities during the plan length to mature early with positive returns, rather than risk market conditions at a later point. The increased likelihood of positive growth makes these particularly popular with clients.

Is Now A Good Time For Structured Products?

So, why is now a particularly good time to invest in structured products? Volatility feeds in to how Structured Product is “priced” by the counter parties. When volatility increases, so does the potential returns written in to the contracts. Furthermore, as central bank interest rates are increasing, this tends to feed in to the interest charged between banks (and therefore the capital at risk structured products). As both of these factors are high or increasing in the immediate future, Structured Products are proving to be a popular method of defined returns with a degree of capital protection.

How Can We Help?

Portfolio diversification and a degree of certainty can help investors gain positive returns in flat or negative markets. There are certain ways in which investors should aim to diversify their structured product portfolio. This is done by looking at features of the plans:

  • Have structured products linked to different indexes. For example, the FTSE 100, Euro Stoxx or the S&P 500.
  • Use different counter parties. By doing this, if the counter-party does default, then you don’t lose the money held in all your plans. While it is important for a counter-party to have a good credit rating, this is not regularly updated. Therefore we also look at credit default swap pricing which gives a real time indication of the reliability of the counter-party.
  • Vary the type of plan. This can be done through choosing between deposit, income or kick out plans. It can also be done through choosing between types of kick out plans.

At Ascot Wealth Management we can look at your risk appetite and financial aims to choose the Structured Products best suited to you. We will  do the research to find the best return rates in the market for the products we would recommend and help you fully understand your investments.

Written by: Alice Frost

14 February 2022

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