Dickie talks Struc Prods: Which products are getting the inflows?

Barclays Wealth director Colin Dickie explains which structured products are the most popular in the current climate.

Like many other structured product providers we have benefited from market conditions that have reduced the appeal of investments lacking downside protection. So what sort of products are investors buying?

I would say we are fairly representative of the industry as a whole in seeing a clear shift into investments providing a fixed return. At the forefront are ‘digital’ products: investments offering a simple defined return as long as a certain condition is met (typically that the chosen index is at least equal to its starting level at maturity). These ‘all or nothing’ investments are easy to understand - if the index hasn’t fallen at maturity the return is paid; if it has, investors get their money back – which partly explains their popularity.

But I would say the fact that the investment return is, other than the ‘no fall’ requirement, independent of index performance is also very important. However the return is at risk and the potential premium one can earn over risk free money is also a major factor, notwithstanding counterparty considerations.

Kick-out products, which offer a fixed return plus the chance of an early maturity, are currently enjoying even stronger demand. Investors’ increased willingness to accept risk to their capital in order to achieve a potentially higher – and relatively rapid – return has been a significant driver of these investments’ popularity; although provider innovation – particularly in terms of the different conditions under which an early payout is triggered – has also played a part.

Finally, there has been major move towards investments paying a high level of income. Largely shunned since 2002, income products are enjoying something of a renaissance as investors continue to struggle to achieve a reasonable rate of income from deposit accounts. Again, the key factor here has been investors’ acceptance of the simple fact that, without assuming some risk, they will not be able to enjoy a decent return.

Investors must also accept that, in contrast to shorter-term deposits, their capital will be committed for a medium term and that, of course, interest rates might rise during that period. These products can generally be sold before maturity but there will then always be risk to capital. Income products typically pay a rate of income that easily surpasses even the best (usually short term) savings accounts and they often do so with a safety margin which means capital would only become at risk if the index halves in value. At current market levels, lots of investors seem to believe that event is probably unlikely.

With few commentators predicting a sudden spike in interest rates – and with the majority of experts continuing to insist that deflation, rather than inflation, is the bigger threat to an economic recovery - it appears that investors will continue to have limited options when seeking a low risk real return for their capital. As long as this environment persists, there is every chance that these three products types will continue to dominate protected investment sales.