'We're not alchemists' A struc prod provider speaks out

Richard Henry, director of investor solutions at Barclays Wealth, on why current 
market conditions are encouraging for structured products.

Some say product development is a mysterious business – one that requires the use of a cauldron or at the very least a wand.

Once you have assembled the relevant implements simply pour on some volatility, add a smattering of six-year sterling swap rates, sprinkle some credit spreads and grate in some ear-of-bat. Bring to the boil and lo and behold, a structured product rises from the mist.

My first confession is to dispel that myth – as product providers we are neither magicians nor alchemists. There, I’ve said it. We can only achieve what is possible from a pricing point of view when market conditions permit. We use the ingredients available to us.

This means if interest rates are higher, you are likely to see higher rates on income products. It means if volatility is higher then you are likely to see higher rates on capital-at-risk growth products.

Market timing

Now the witch’s cat is out of the bag, I have some explaining to do – but all in good time. First let’s talk about those market conditions I mentioned above. Since July, much like the weather, we have seen pretty much all types of conditions. For the FTSE that means moving from 6,000 to 5,000 and everywhere in between, with volatility doubling and then halving along the way. It has been a remarkable few months for the markets, driven by significant events close to home.

Given those events – general economic unrest, the European debt crisis and collapse of several governments as a result, and lukewarm growth elsewhere – the market movements are hardly surprising. That they have influenced investors and providers is also unsurprising.

From an investor’s point of view, given the significant swings in the market, the defined returns offered by structures are understandably attractive. But how should product providers react?

Market timing remains a thorny issue on which much has been written, and it remains a dart which is thrown at structures (unfairly in many cases). To give a couple of examples, the Telegraph ran a piece last month ago entitled “Yet again, private investors muck up their timing”, covering the fact that fund sales in September were at their lowest level in three years.

Less recently but equally relevantly, Cass Business School released a paper entitled “Do UK retail investors buy at the top and sell at the bottom?” It was a lengthy piece, but as you would expect the executive summary was “Yes”.