Structured products have had a very good yearFebruary 21, 2017 - 07:42
in structured products will have noticed that the value of their investments
has increased sharply over the last 12 months. As the chart below shows our
index of UK Autocalls is up by 26.9% over the last year. This short-term
performance will be surprising for many, and it made us blink as well.
To put this
into context the chart shows the level of our UK Autocall Index and the
performance of the FTSE iShare. Both have been rebased so that the value on 11
Feb 2016 is 1000. The Autocall index is up 26.9%, the iShare is up 36.2% return
over the same period. What is apparent from the chart is that the volatility of
the Autocall Index is much less than the volatility of the iShare. In fact, the
Autocall Index volatility has been 8.5% versus volatility of 14.8% for the ETF.
This means that the Sharpe for the Autocall index is 2.69 versus 1.93 for the
question for investors is to determine if this is a fluke or will Autocalls and
similar structured products continue to offer superior risk-adjusted returns?
We accept that there is a large element of good timing in these returns. The
annual returns we calculate next week, and next month are likely to be lower
reflecting the higher starting point. The base level for the 1-year return
calculation was the low point of 2016, and the markets have risen steadily ever
since. However, looking at this comparison over longer and shorter periods
there is not a single observation period that we calculate where the Sharpe of
the Autocall index is less than the Sharpe of the iShare. FTSE Autocalls have
offered consistently better risk-adjusted returns than the most popular ETF
tracking the same index.
that there is a strong case for an increased allocation to this sort of
investment now. Compared to vanilla equity exposure Autocalls and similar
products are a mix of the following assets and strategies:
calls, capping the upside, but generating an immediate return
through down and out puts, the soft protection embedded in most products is
like using down and out puts to hedge equity exposure. Down and out puts are
one of the lowest-cost forms of protection
investors are very optimistic about the prospects of further gains from the
main equity markets a hedged covered-call strategy would seem to have a very
good chance of delivering a better return than a tracker fund. The absolute
level of returns will almost certainly be less than they have been over the
last 12 months, but we see no reason why the risk adjusted returns should not
continue to be better than the equity market.
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.