Structured Products VS TrackerNovember 13, 2015 - 16:36
The CUBE Benchmark Performance Index (BPI) is a
measure of the arithmetic expected return of a product compared with a
In this analysis we have compared the arithmetic
expected return of FTSE linked structured products against that of a
hypothetical FTSE Tracker fund
All of the tested FTSE linked structured
products with capital at risk had a BPI of more than 100% indicating that the
average expected return is higher than the expected return of the tracker fund
Previously we have looked at the realised returns of FTSE
linked structured products and compared this with the realised return of the
FTSE including dividends over the same period, and our conclusion was that the
structured products had delivered a better return with less volatility.
Now we are looking forward, and using our stress-testing
engine to compare the possible performance of FTSE linked structured products
to the performance of a FTSE Tracker fund. Our conclusions are broadly the
same. Our analysis shows that structured products with capital at risk are
expected to offer better returns than the FTSE Tracker.
Our starting point is the list of FTSE linked retail
products available today (13th November 2015). There are 32 FTSE
only products in the market of which 9 are deposits and the remainders are
investments where the investor’s capital is at risk.
The benchmark for all of these products is a hypothetical
tracker. We are assuming that the tracker receives 100% of all dividends, and
has total costs of 1% per annum. This reflects both the costs of the fund, and
of the platform / account through which the product is held. This seems
reasonable on the basis that the retail products we have selected all include
the costs of the “plan” wrapper.
The products and the tracker are then put through the same
stress-test process. We simulate millions of new potential paths for the underlying
index, and we work out what the returns would have been for the products and
FTSE Linked Structured Products versus FTSE Tracker
Source; Investment Product Research. Figure 1
above shows the chance of all FTSE linked products offering a higher return
than the FTSE Tracker. The products have been ranked in the order of their
chance of beating the FTSE. The right hand scale shows the Benchmark
Performance Index of each product (BPI)
CHANCE OF BEATING THE FTSE
When it comes to comparing the performance of the product
versus the tracker we can in the first instance look to see how often each
product offers a better return than the tracker. This simple comparison is an
obvious starting point, and we can see from the chart above that 19 of the 33
products meet this test. Excluding the deposits 18 of the 23 retail structured
products are expected to offer a higher return than a FTSE tracker fund
BENCHMARK PERFORMANCE INDEX
The chance of outperforming the benchmark is a useful, but
simple, way of comparing one investment with another but it ignores factors
that we think are important.
In the instances where a product offers a better
or worse performance what is the scale of the relative performance
Many structured products have variable maturity
dates, we need to take into account the term of the investment as well as the
annualised return from the product and the tracker
The CUBE Benchmark Performance Index for each product is a
like-for-like comparison of the product returns versus the returns from the
tracker. It is a measure that compares the product returns versus the Tracker
returns taking into account the chance, duration and scale of the relative
performance of the two assets.
A BPI of more than 1 means that the average expected return
of the product is greater than the average expected return of the benchmark
index (the FTSE Tracker in this case). The BPI also gives a measure of the
difference in the expected return. A BPI of 1.05 means that the average expected
return of the product is 5% greater than the average expected return of the
The Benchmark Performance Index of 27 of the 33 FTSE linked
structured products is greater than 1. The average BPI across all structured
products is 1.02, implying 2% per annum additional performance across an
equally weighted basket of all products.
Excluding the deposits the picture gets even better;
Figure 2; FTSE
Linked Products with Capital at Risk
Source; Investment Product Research. Figure 2 above shows the chance of FTSE linked products with capital at risk offering a
higher return than the FTSE Tracker. The products have been ranked in the order
of their chance of beating the FTSE. The right hand scale shows the Benchmark
Performance Index of each product (BPI)
The analysis throws up a number of interesting points:
The relative appeal of structured products based
on the BPI is at odds with common perception. This analysis shows that
structured products offer investors real value.
Supertrackers come out of this analysis
particularly well. All of the supertrackers with capital at risk are in the top
6 products ranked by chance of beating the benchmark.
The best products using the BPI tend to also be
the products that we consider to be the best using our risk / return measures
which is not surprising.
The defensive products look to be marginally
better than non-defensive shapes.
We need to add some caveats here. This analysis is NOT
saying that all structured products will always offer better returns than a FTSE
Tracker, but rather that the average expected return of all of the products is
higher than the average expected return from the Tracker.
Structured products are also subject to other risks; the
risk of issuer default is the obvious additional risk. Structured products may
also be less liquid. Retail products may be subject
to additional costs imposed by the plan manager when you want to sell early.
The mark to market performance of structured products will reflect changes in
rates, volatility and issuer funding which will not affect the tracker.
David has been involved in equity derivatives, equity structuring and the structured product market for over 25 years. Before setting up CUBE in 2013 David worked at J.P. Morgan, Barclays and RBS. David has worked with and for retail product providers, discretionary managers and institutional investors.