Hello, and welcome to the Morningstar series,
‘Ask the Expert.’ I’m Emma Wall and here with me today is Rosie Bullard, Portfolio Manager
for James Hambro & Partners. Hello, Rosie. Good morning. So hot topic at the moment, structured products.
I thought we perhaps could start with asking what exactly are they? Well, a structured product has a very broad
definition. It’s a pre-packaged product based around a series of derivatives; and really
through a structured product you can get exposure to a range of different underlying assets.
It could be single stocks, baskets of stocks, indices. You can get exposure to commodities,
debts, foreign exchange. It’s almost a definition a little bit like hedge fund, in the fact
that it’s very broad brush and can really encompass a range of different underlying
exposure and risk being taken as well. And a bit like hedge funds, there are good
ones and there are bad ones. Structured products got tarred with an almightily bad brush a
couple of years ago. What went wrong? I think it was really a lack of understanding
in what the structured products were meant to achieve and indeed the risks being taken.
So be it understanding counterparty risk; who is on the other side of those derivatives
trades? And particularly in the financial crisis, understanding whether that counterparty
may be at risk of default or not. I think a lot of investors didn’t understand
how the structured product was going to achieve its end returns; i.e., if there were hurdle
rates to be met; how are those hurdle rates going to be met and were there multiple hurdles
that had to be met in order to provide the returns that were expected from the particular
product? There was also a lot of scrutiny about fees.
The charging structure of the product itself, how was that calculated in terms of what the
structure was taking, and indeed, the counterparty in terms of derivatives being structured around
that note, how they’re taking their fees as well. And a lot of them turned out to be very,
very expensive when one opened up the car bonnet and really looked at what was inside
the product itself. You’ve mentioned the sort of wide ranging
and often complexity of these structures. One of the things, I think, also added to
that confusion is they could be called so many different things. Somebody might call
it a structured product; some people might call it a guaranteed income plan; some people
might call it cash-like investment, bond-like investment.
But the bottom line was these products were offering what looked like guaranteed income
with capital preservation, which brings us to why they’re beginning to be back in the
investors’ mind is because in this post-retirement space, now that we don’t have to buy annuity,
people are looking for the sort of product that these sound like.
They’re looking for guaranteed income and they’re looking for capital preservation.
I mean what’s the alternative if it is not an annuity and not astructured product? I think wherever one hears the word guarantee,
you have to work out why is that guaranteed and what it’s going to cost me in order to
get that guarantee. A lot of investors are concerned about bond markets looking over
value to the equities, perhaps having run too far.
But if structured products are based on those underlying asset classes anyway, it’s going
to cost you quite lot in order to buy a structured product that’s going to guarantee you an
income and also guarantee you that you’re going to have capital preservation.
And really it comes down to, as with any portfolio, understanding what that particular product
is doing, why it’s doing it, what your returns are going to be, what the volatility is going
to be, and most importantly, how it fits within your overall structure; what have you got
in the portfolio already, and what is the structured product going to provide in return. And if you are not willing to pay those fees,
what could people be doing to look in that – post-retirement space, with their SIPP perhaps? I think there has been a lot of scrutiny about
SIPOs and what’s going to happen post April 5 in terms of what people are actually going
to do with that money. We’ve still got a very beneficial environment for long-term investors
within SIPPs, where you can have very high levels of tax efficiency, be it capital gains
tax efficiency or income tax as well. If your portfolio is already structured with
some high-quality yield equities, we don’t feel a need to touch those investments at
the moment. Equities, of course, have run a long way since the lows of the financial
crisis, but in our mind they are not looking overvalued at this point.
You’ve always got to be careful with what you’re holding inside your SIPP, as indeed
any portfolio, what valuation point it has got to, and when you’re going to take profits.
But I don’t think there is a need to rush out of the door, sell all your bonds, sell
all your equities and try and buy lots of capital protection when it could actually
cost you a lot of money. Rosie, thank you very much. Great. Thanks. This is Emma Wall for Morningstar. Thank you