Chris Flood, in the Financial Times on 8 July 2013, provided a useful analysis of the current state of the market for structured investments. In general, at Cantab Asset Management we do not encourage clients to invest in structured products. However, there are circumstances where it might be appropriate to consider their use and we do research the area where applicable. We suggest that those interested read the following analysis by the European Securities and Markets Authority:
“Structured products and “alternative” Ucits that use hedge fund-type strategies have delivered “relatively low” returns to retail investors over the past five years, according to analysis by the European Securities and Markets Authority, ESMA.
Esma, the regional regulator, said it was concerned about possible risks to consumer protection as retail investors might not have sufficient financial expertise to understand these complex products. Structured products sold in Europe have only delivered annual average returns of 2.5 per cent between 2007 and 2012. Returns for alternative Ucits have been slightly better at 3 per cent a year over the same period, but have also been very volatile.
In comparison, European equities, as measured by the Eurostoxx 50 index, delivered a 3 per cent annual return over the same period while a “risk-free” holding in 12-month Euribor returned 2.7 per cent.
Sales of structured products have declined since the financial crisis, falling from €250bn in 2007 to €110bn last year. Outstanding issuance stood at €770bn at the end of 2012. However, issuance has grown strongly in some countries, with 1m products issued in Germany last year, up from 162,000 in 2007.
Retail investors had to pay a significant premium, estimated at up to 5.5 per cent of the issue price, when buying structured products, said Esma. The regulator plans to use its finding to promote better disclosures at the point of sale about the total costs of investing in these complex instruments.
The regulator also warned that the size of the structured products market could potentially give rise to financial stability risks if issuers relied on these instruments as a source of funding or if the exposures of retail investors were large.
Thomas Wulf, secretary-general of the European Structured Investment Products Association, argued Esma had used data “selectively” in its report. He said Esma’s calculation of the premium paid by retail investors when buying structured products was calculated over a three-year period and that a more appropriate annual estimate would be closer to 1.8 per cent.
Jamie Smith, chairman of the UK Structured Product’s Association, said Esma’s report showed a lack of detailed understanding of the structured products market, adding that he was concerned this would result in an inconsistent approach towards the regulation of financial products available for sale to retail investors.
But Guillaume Prache, managing director of EuroFinuse, an investor lobby group, said there should be stricter controls on the sale of structured products to retail investors, as many of these instruments had failed to deliver real positive returns.”
Chris Flood, Financial Times (8 July 2013)
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
