Trackers v structures: Why it’s worth another look

Ian Lowes of structuredproductreview.com matches a portfolio of five SPs against a proxy tracker and says the result provides an interesting perspective on the value of structures

Sophie Barnett, the vice president of Morgan Stanley, has previously made a compelling and, in our view, quite correct, statement that structured products (SPs) and tracker funds are fundamentally different investments and therefore extremely difficult to compare.

Both can be valuable elements of a diversified portfolio and we do not mean to prove that one investment is ‘better’ than another, but this does not mean their respective performances should not be analysed.

This is not the first time we have examined the returns of structured products and tracker funds.Following the IMA’s study into the returns of tracker funds and National Savings Guaranteed Equity Bonds in July, we set up a ‘challenge’ with the IMA that pitted a portfolio of five structured products against a tracker fund chosen by the IMA (the HSBC FTSE 100 Index fund).

The investment landscape has changed considerably since July with the turmoil of the summer seeing indices tumbling around the world. The pricing of structured products changes according to market conditions and these have currently led to some extremely compelling propositions, especially framed against a backdrop of continued equity market volatility and lowered growth expectations.
Furthermore, competition among the providers in the UK market typically leads to considerable diversity in the product types on offer.

The premise

Considering the plans that have been available in the IFA market recently, we felt it would be a useful exercise to look again at the potential returns that could be gained by blending five SPs into a basic ‘portfolio’ and comparing this return to what might be gained in similar circumstances via a tracker.

If we are investing in a tracker, or portfolio of trackers, we would assume that we are either buying with a view to holding for the medium to long term or intending to trade in and out of the market as we see fit.

As the latter is a form of active management, it is only really appropriate to consider a comparison against a buy-and-hold strategy. Consequently, to make our research as balanced as possible, the parameters are as follows:

• A proxy tracker is created returning index plus 2.5% to account for dividends, less charges.

• The SP portfolio will consist of five products in equal weighting.

• The initial investment time horizon commenced on 25 November and runs to 31 December 2017.