More than semantics

Emma Davidson, head of Retail Sales UK and Ireland, Cross Asset Group, for Citi, looks at the main differences between structured products and structured funds

As we know, the markets ended 2010 on a relatively high note. And with a broadly bullish start to 2011, there are great opportunities for fund managers and providers to build on those gains made.

Demand for structured funds and structured products is likely to continue to be robust, and while it may sound like semantics, the majority of independent financial advisers will be aware that there are crucial differences between structured funds and more traditional structured products /structured notes.

Let’s briefly touch on the core differences. In a nutshell, structured funds are open-ended, meaning investors can get in and out at any time, whereas with structured notes, investors are potentially tied to a fixed term and a single investment date. Citi’s recently launched UK Autocall Fund, for example, carries daily NAV pricing with attendant daily liquidity which conforms to regulatory requirements. Structured products/notes, on the other hand, will usually provide a secondary market but there is no requirement to do so.

With respect to counterparty risk, Ucits structured funds are generally collateralised in keeping with the Ucits rules around diversification of underlying assets and counterparty risk. The latter is something that is inherent in traditional bank-issued structured products/notes. Citi’s Autocall Fund, for example, is collateralised with G7 government debt, making it extremely secure.

Ucits funds are closely regulated, and have to maintain appropriate disclosures including all costs providing very high levels of transparency. This ties in well with the aims of the Retail Distribution Review (RDR), which is anticipated to come into force at the end of 2012.

Structured funds are an attractive addition to client portfolios as they deliver precise exposure to specific asset classes, such as equities, emerging markets, commodities etc. Unlike traditional “long-only” funds, structured funds can provide investors with a range of risk and reward profiles including capital protection, conditional protection, leveraged exposures, inflation protection and so on.

Increasingly, we have seen fund managers opting to use structured products or derivatives within their funds, with Schroders Income Maximiser being one example.

It is also encouraging to see IFAs become far more confident with structured investments per se, and part of our ongoing strategy at Citi is to broaden the dialogue between product providers, the adviser community and fund platforms.

The best of both worlds – in our view – is an investment that combines the most attractive elements of structured products (predefined returns/precise investment strategies/specific market-risk controls) with the open-ended wrapper enjoyed by mutual funds.

We predict an increasing interest in fund-wrapped structured investments. There is product flexibility with regards to fees, as well as adviser compensation to accommodate various business models. Also, the client assets are collateralised and segregated from the fund provider.

Ucits-compliant structured funds with 100 per cent daily collateralisation and full transparency to embrace the forthcoming RDR legislation, combined with simplified factsheets and prospectus’, provide both financial advisers and their clients with a winning formula.

That is not to say that structured funds are not without their challenges. The continuing fallout from the Lehmans’ collapse, ongoing media scrutiny of structured products and other issues like ISA eligibility mean that a continuing process of education and enlightenment between product providers and IFAs is essential.

Of course, regulation will play an increasing role in the coming years across the entire investment community. Investment propositions like the UK Autocall Fund that take into consideration the ever-changing legal and regulatory framework as well as the fact that advisers are looking for products for their clients that offer income and capital protection without counterparty risk, will continue to find favour.

We expect to see a wide range of investment propositions utilising the Ucits structured fund wrapper to provide investors and their advisers with the ultimate in choice, security and flexibility.