Structured product VS the IndexOctober 28, 2016 - 10:34
We have analysed the maturity value of 116 FTSE 100 linked structured products and compared the annual return to the total return from the FTSE and the FTSE iShare. Our analysis shows that the returns from structured products were greater than the returns from the iShare for 65% of the products in our study. The returns from these products are much more consistent than the returns from the ETF's. The median return from the matured structured products is higher than the index and ETF (7.2% per annum versus 6.l3% for the iShare), and the worst returns are much better.
Overall the analysis highlights the benefits of structured products for investors that are looking for a high chance of a good, stable return across a broad range of market conditions. In particular the analysis demonstrate the appeal of structured products when the return from equities and bonds is expected to be low.
The structured products we have looked at in our study are those that have the following characteristics:
- They are linked to the performance of the FTSE 100 Index
- Issue since July 2013 and now matured
- They are Enhanced Return products, this group includes Autocalls, Synthetic Zero's, Binary and Digital structures
- They had a term of five years or more when they were issued
- They had flat, declining or no early maturity triggers
The benchmark index we have used for comparison is FT100-TR. This index measures the total return of the underlying FTSE 100 index, combining both capital performance and income (reinvested on the dividend (xd) date). Bloomberg TUKXG.
We also compared the performance of structured products to ISF, the FTSE iShare.
Each point on the chart above shows the annual return from each product and the annualised return from the index over the same period. The investment is assumed to start at the strike date or initial valuation date and run through to the final valuation date of each structured product. This analysis allows a direct comparison of the return that the investor has received from the structured product versus the total return from the index. For all points above the dotted line the return from the structured product has been greater than the return from the index. For points below the line, the returns from the index have been greater than the return from the structured product.
There are a number of conclusions that we can draw from this analysis.
- There is remarkable little correlation between the index returns and the realised returns from these products, as a result:
- When the returns from the index are large the returns from the index tend to be greater than the return from they type of structured product we have looked at.
- When the returns from the index are low the returns from the index tend to be less than the return from the type of structured product we have looked at.
- In the instances where the returns from the index were negative or positive but very low, structured products were still delivering positive annualised returns.
We can look at the cumulative distribution of returns. The chart below illustrates.
Source: Cube Investing, Bloomberg
- The return from the FTSE Autocall was higher than the return from the index for 60% of the products, and higher than the return from the FTSE iShare 65% of the products.
- The median annualised return from the index is 6.6% (ISF 6.3%) versus a median annual return of 7.2% from the structured products.
- 85% of structured products returned more than 6%. The annualised return from the index was more than 6% for 60% of the periods. The FTSE iShare exceed this return for only 54% of the periods we looked at.
- Of the 116 products in our study only two matured with a return of less than 5%. The index failed to offer this return on almost 30% of the investment periods.
- The average annualised return from the index is 8.1% versus an average annual return of 7.4% from the structured products.
The analysis demonstrates the benefits of this type of structured product for many investors. Enhanced Return products will appeal to investors that want a high chance of a good return with a degree of protection. In our study investors received a better return than a FTSE tracker on almost 2/3 of the products that we looked at. The variation of returns has been lower, and products have offered a positive return even when the return from the iShare has been very low.
For investors that think that returns from equities will be low in the future, an increased allocation to enhanced structured products may be an investment decision that proves to be beneficial.
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.