Introduction to CubeMay 19, 2014 - 10:00
Introduction to Cube
Cube Investing is a new provider in the UK structured product market. We see ourselves as a provider of structured investments. We are not a Plan Manager or Structured Product provider. Instead we are looking to create attractive investments. We are working with a number of banks to create and distribute new investments that will be bought and held by investors via wraps, platforms and brokerage accounts, in the same way that they buy and hold Exchange Traded Funds (ETF’s).
All investors are looking for attractive investments to hold as part of their portfolio. These may be one-off investments that work on a stand-alone basis or assets that will be used as part of a model portfolio to give exposure to a particular market. In either case, what we aim to do is to work with the issuing banks to develop new products that offer an attractive mix of risk and return.
Structured products have received a lot of bad publicity, and have been under close inspection by the regulator. The main focus of the regulator’s attention has been structured products distributed by the high-street banks through their own advisers. Structured products distributed through advisers, and those used by discretionary managers, have in fact performed very well. The reality is that all structured products that have matured over the last 5 years have delivered exactly what they promised, and many have offered a better return than the underlying market. Looking forward, we think that structured investments can be created that offer a very appealing mix of risk and return for investors.
The second leg of our strategy is to offer investments that offer exposure to an asset class. We will design these investments to be used by investment managers as part of a model portfolio. They will give exposure to major assets like UK or US equity, commodities, bonds and alternatives, and can be developed to offer additional protection, or extra income. We aim to use our own product development skills, along with the expertise of the banks that we work with, to create attractive solutions for investors.
Investors and advisers need to understand what risks they face when they buy an investment, and what returns they may receive. Up to now, this sort of clear information has been missing from structured investments. As a result, investors have not been able to see what structured investments offer and advisers have naturally been reluctant to recommend structured investments because they cannot easily justify their selection.
All of our investments will come with a Cube Risk score. First, we calculate the volatility of the distribution of annualised returns that an investor may receive based on our stress test. We can then use this volatility value to place the product on the SRRI (Synthetic Risk and Return Indicator) 1 to 7 risk scale that is mandatory for all funds, or on the popular 1 to 10 scale used by many advisers. The Cube Risk score is updated every week for every product before and after the strike date, allowing investors to keep on top of the investments that they own.
|1 to 10
We also calculate the expected return from our stress test. This is the average compounded annual growth rate. The Cube Return score allows an investor to compare the returns that they may receive from our investment with the returns that they may get from other assets.
An accurate, reliable and transparent measure of the risk and return that an investor can expect is, in our view, key to getting investors to appreciate the appeal of structured investments. Unless investors know and understand the sort of return that an investment offers, and the risks that they face, they cannot realistically be expected to make informed investment decisions. Similarly, advisers cannot really justify a product recommendation without the same information. They need to know that a product is appropriate for the investor’s attitude to risk and their capacity for loss. Without this quantitative analysis, an adviser is going to struggle to justify any recommendation they make. On the other hand, armed with this information, advisers can make recommendations with more confidence knowing that they have selected the most appropriate investment for the investor, and with the audit trail for their file that documents the selection process.
Cube Research will be available on all retail structured products, so allowing investors to compare one product with another, and to select the most appropriate product for each investor. We will offer our product list with Cube Risk and Return scores, and product selection tool for free for a limited introductory period. The research will continue to be free for advisers that invest on Cube products. Product promoters can also pay to make our analysis of their products freely available to advisers. We are also working with a number of wraps, brokers and platforms to make our analysis freely available to their clients.
Investments Designed for wraps and platforms
According to Platforum:
- Platform assets were £265bn by Q3 2013
- £11.58bn of new business was written on platforms in Q4 2013
- 34% of Q4 gross sales (£17.5bn) went into model portfolios
- Structured investments account for just 0.07% of Q4 investment sales on platforms
It is no surprise to us that there is virtually no investment into structured investments through wraps. The buying and selling process is not easy, the plan manager can impose limitations on liquidity, the value of the investment may not show in the investor’s portfolio, and there are layers of unnecessary costs.
Cube is the first independent structured investment provider to develop investments specifically for this market. Our view is that by creating investments for this channel, we can attract significant volumes. Our investments will be bought and sold by wraps in exactly the same way that they buy and sell ETF’s.
No application forms
There is no application form for any of our investments, investors simply instruct their broker or wrap to purchase the investment for them. There is no requirement to attach a cheque to the application form, and no requirement for Know Your Client (KYC) or Anti-Money Laundering (AML) checks. The investor and their adviser will get an immediate confirmation that they have invested, so they don’t need to wait to see if they own the investment.
Part of the portfolio
The investment is held alongside all of the other funds and assets that they hold. The investment has a daily price, and will be valued every day as part of their portfolio. There is no need for the investor or adviser to have to consolidate off-wrap assets with the main part of their portfolio held on a wrap. If the adviser is charging an annual fee based on the clients portfolio value, our investments will automatically be included in the portfolio.
The reduced administration burden eliminates a major impediment for a lot of investors and advisers. In the post-RDR world, as commissions have disappeared many advisers were struggling to justify the time and effort required to invest into off-platform structured plans.
Most of the investments we offer will have a 6-week trading period before the strike is set. This will give investors a chance to buy the product at “par” and know that the terms are fixed. After the strike date, some of the issuers that we work with will continue to allow investors to buy in the secondary market and so take advantage of market opportunities that arise. All of the investments will have a price at which investors can sell their holding every day, providing that markets are functioning normally.
Lower costs, so better terms
Structured plans include brokerage, dealing and administration charges within the product. Because these fees are built into the investment, it has the effect of reducing the terms on offer to the investor. Because our investments are bought through a wrap, platform or brokerage, there is no requirement for the “plan wrapper”. Eliminating the plan wrapper means eliminating the costs associated with the plan. The consequence is that the terms we are able to offer investors improve.
To put this in context, when plan management, administration and brokerage fees are disclosed they are typically between 0.5% and 1%. This is value that we are able to keep in the product to benefit investors.