ACCESSING STRUCTURED PRODUCTS

Transcription

1 ACCESSING STRUCTURED PRODUCTS AN ADVISER S PERSPECTIVE Tier One Capital Independent Wealth Management

2 WHO WE ARE We are a start-up HNW wealth management business founded in July 2012 and our core team consists of four industry professionals supported by an advisory board of nine experienced investors/consultants. At Tier One Capital we pride ourselves on providing a first class investment experience that positions client portfolios to deliver the long term returns they are seeking whilst suitably diversifying their holdings.

3 INVESTMENT PHILOSOPHY Our view is that structured products are an attractive way to enhance adviser control when constructing a portfolio. We do feel however that advisers can spend too much time considering individual opportunities and too little time considering how/where each one fits into the holistic approach. An adviser should clearly not be product led. This should not be confused with continually striving to provide clients with access to great products.

4 Before reviewing how to access different types of structured products, it s highly important to have clarity around what you are trying to do. DEFINE YOUR STRATEGY The investment philosophy we adopt for structured products embeds them into a classic core and satellite approach throughout our model portfolios, staying true to our SAA/TAA throughout. The core holdings of our portfolios are constituted of cost efficient passive instruments including exchange traded funds, exchange traded commodities and traditional low cost tracker funds. This allows us to aggressively reduce the true cost of our portfolio management.

5 No matter how high the headline returns offered are, or how attractive the potential tax-efficiency appears to be, remember that a structured product will only produce a positive return if the underlying strategy is ultimately based on a successful view. FIRST TAKE A VIEW THEN TAKE A POSITION BULLISH BEARISH PLATEAU HIGH VOL LOW VOL OUR VIEW: With 375 billion of QE to come back out of the UK economy, continuing economic difficulty in Europe, and the effects of an extended lack of funding to the SME sector yet to come through, we feel the most likely scenario is an extended plateau in the developed markets. OUR POSITION: To hold an efficient core portfolio with satellite assets around the periphery that we believe will generate a high single digit/low double digit growth in slowly rising, flat or mildly negative markets to combat inflation (and the potential spectre of a return of stagflation).

6 DIVERSIFY HOLDINGS Ensure you build your portfolio with purpose. A well thought-out and well planned client portfolio will build in diversification on many layers. An adviser s responsibility is to... SPREAD COUNTERPARTIES SPREAD MATURITIES SPREAD STRIKE LEVELS SPREAD PROTECTION BARRIERS SPREAD STRATEGIES SPREAD RISK LEVELS

7 HOW TO GAIN ACCESS There are many ways to access quality information about, and to invest into, structured products... COMPARISON WEBSITES ANALYTICAL WEBSITES PLATFORM PROVIDERS SP PLATFORMS SUCH AS SPwrap DIRECT FROM COUNTERPARTIES DIRECT FROM PROVIDERS INDIRECT THROUGH DFM s PRIVATE BANKS LISTED / SECONDARY MARKET NOTES EXECUTION ONLY / STOCKBROKERS

8 SPwrap

9 NEW LAUNCH vs. SECONDARY MARKET Generally this is centrally concerned with balancing control and efficiency, however the two are not mutually exclusive. Creating a new launch will give the freedom to construct a bespoke solution for a particular client or group of clients but requires a high critical mass of funding. The secondary market will offer defined terms with more efficiency after the original fees come out but requires more proactivity and responsiveness due to the live nature and inherent daily price movement. Lack of mass interest in the secondary market currently creates attractive pricing anomalies but this inefficiency will fade as the market grows.

10 ONE OFF ADVICE OR ONGOING SUPPORT? The current approach of some IFA s and wealth managers is to advise on structured products at point of launch only. Our thoughts are that this is already a dated approach and will stand to be increasingly exposed as such over time as technology is rolled out making it easier and more lucrative to access, analyse and advise on notes post-launch. The key point is that a structured product is not a fixed investment and the price of a note in the secondary market moves about daily - creating a need for ongoing suitable advice.

11 MOVEMENT IN THE SECONDARY MARKET Structured products do not move exactly like a bond nor exactly like an equity, they are a hybrid and therefore move according to a number of variables - recognise this and adapt. The defined nature of the terms contained in a structured product create an ability to methodically analyse notes and specifically target notes launched in specific periods. Good planning and patient timing can create a double-leverage whereby the equity content of the structured product has locked in at an attractive level when launched and the bond element can be obtained at an attractive level when purchased. When you consider the transparency benefits of a listed note in the secondary market, this area starts to look an excellent hunting ground for an enhanced risk/reward balance.

12 VIX INDEX HISTORY Tier One Capital Independent Wealth Management

13 QUALITY IS KEY We believe the combination of a wider breadth of high quality investment opportunities supported by high quality data with convenient analysis is of material benefit to any adviser. In a post-rdr world the provision of a high quality service is vital. A key driver of this is the delivery of high quality investment opportunities. Another key driver will be delivering information that is: timely accurate accessible relevant Lastly, utilising systems and platforms able to facilitate this in a streamlined and cost efficient way will be absolutely vital to meeting the new standards required.

14 When you look at credit cards you invariably focus on the APR being charged as a valid comparable between different charging structures. As an adviser you must also have a valid comparable for structured products to allow you to sense check whether the rate being offered for the risk appears to be of value. USE A VALID COMPARISON We use an annualised compound return (ACR) for both new launch and secondary market structured products. Calculating a notes ACR figures allows for a quick comparison of like for like: Simple cumulative return of a 5yr 10% autocall: 10% 20% 30% 40% 50% Annual ACR figures for the same note: 10% 9.54% 9.14% 8.78% 8.45%

15 LISTED OPPORTUNITIES Defensive European Option Autocall Tier One Capital Independent Wealth Management Investment 50,000 Strike Level 5900 FTSE Level Today Annual Bonus Level 8.50% Today's Date 31/01/13 Growth Rate Required -6.12% (i.e. The FTSE has to fall by less than this % to be successful) Purchase Price Counterparty Bank A Protection Level Buffer 41.12% (i.e. The FTSE has to fall by more than this % to breach) Purchase Fee Proposed 1.00% Observed Return Date Term (yrs) Investment Units FTSE Level Return Gain A.C.R Return Net of CGT Required Successful Call In Nov /11/ ,000 42, % 5.46% 6.97% 52,731 51,966 Successful Call In Nov /11/ ,000 42, % 12.61% 6.87% 56,303 54,538 Successful Call In Nov /11/ ,000 42, % 19.75% 6.69% 59,874 57,109 Unsuccessful Call 13/11/ ,000 42, % % % 17,654 N/A * One for One risk below this level

16 INDEX TRENDS Pay close attention to the options based nature of structured products - the success/protection of a note will usually be based on a specific strike and will rarely take into account dividend income. The total return of the index thus becomes meaningless and the nominal level of the index is paramount. It is therefore useful to be aware of the long term trends of the major indices since the turn of the century - most of which have been startlingly negative which means large numbers of notes launched at specific times (such as autocalls and geared returns) are not producing a positive return or protecting wealth against the erosionary effects of inflation.

17 FTSE 100 HISTORY Tier One Capital Independent Wealth Management

18 S&P 500 HISTORY Tier One Capital Independent Wealth Management

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21 EUROSTOXX 50 HISTORY Tier One Capital Independent Wealth Management

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26 ENGAGE CLIENTS WITH TRANSPARENCY Structured products are most often lambasted for a lack of clarity - actively work against this and seek to provide the required regulatory information in an accessible format. For each structured product we provide the following: a one page layman s terms walkthrough of the key risks and terms of the note the termsheet an analysis page outlining key figures (e.g. the ACR, the maturity dates, protection level etc) a historical graph showing the performance level required and protection level built in

27 LOWERING RISK WITH DISCRETIONARY PORTFOLIOS Retail structured products have been undeniably mainstream now for around four to five years yet they remain viewed as esoteric, opaque and risky instruments. They continue to generally receive a bad press and regularly generate polarised absolute views as to their benefits and investor value, whilst an enhanced regulatory focus is present. Segmenting off a specific structured products portfolio to be managed on a discretionary basis makes a lot of sense for both clients and advisers from a risk control perspective whilst also clearly aiding quality control, time management and responsiveness.

28 There is an incredible amount of raw data out there, try to refine what you re looking for and develop your information channels. An excellent starting point is the websites and literature of the providers themselves, and books on the subject are also available. LSE listings increasingly represent a great source of information. UK based academic research remains scarce but European research is much more widely available due to the more mature markets. FURTHER RESEARCH Wrap platforms such as SPwrap.com are making high quality information easily accessible and specialist firms such as FVC and structuredretailproducts.com can provide in-depth analysis.

29 QUESTIONS & ANSWERS

30 CONTACT DETAILS stephen black TRISTAN DE GABIOLE EMMA BLACK tel web tieronecapital.co.uk facebook tier one capital Tier One Capital Independent Wealth Management