Structured products are an invaluable supplement to the portfolios of retail investors, according to Andre Buck, Global Head Sales Securities and Exchanges at SIX, speaking on an expert panel at an event in February this year. This comes as many retail investors struggle to obtain decent risk-adjusted returns through traditional financial instruments such as fixed income and equities.
Buck acknowledged that structured products had enjoyed a positive year performance-wise in 2018 despite wild market gyrations and geopolitical instability. This is in marked contrast to many active asset managers, who have notably struggled to produce returns. According to Lowes Financial Management, not one single capital at risk structured product that matured in 2018 produced a loss, with gains averaging around 6.33% in aggregate.
"Structured products performed well last year and investors are certainly satisfied with their returns. However, other investment vehicles such as exchange traded funds (ETFs) and passive tracker funds have produced much better performance than structured products over the past decade." As a result, retail capital inflows into cost efficient ETFs and passives have far outweighed what structured products have accumulated recently, added Buck.
ETFs globally now manage around $4.8 trillion, having benefited from the 10-year long equity bull run. While ETFs have numerous cost, return, liquidity and transparency benefits for clients, structured products can help investors achieve better diversification, as they are not simply following a benchmark. Buck said that while traditional financial instruments and asset classes should still form the bulk of investors’ portfolios, structured products were a useful overlay to have as a risk mitigation tool, especially in falling market conditions.
Furthermore, criticism about structured products being unduly opaque and excessively complex is also receding, a development which may result in more advisers recommending the asset class to their underlying clients. "The industry has advanced tremendously, and investors are now able to get more pricing information about structured products through platforms and exchanges, which enables best execution," explained Buck.
Structured products have also been on the receiving end of increased regulatory oversight. Tighter product governance rules introduced under the wide-reaching Markets in Financial Instruments Directive II (MiFID II) now requires intermediaries to validate whether certain asset classes are suitable for their clients’ risk profiles, said Buck. However, target market deviations are permissible in rare instances provided it is for diversification purposes in the context of the client’s broader portfolio.
The question was brought up whether structured products would benefit from additional regulation, mirroring UCITS or AIFMD (Alternative Investment Fund Managers Directive), both of which helped create fund management brands in their own right, leading to increased flows. While UCITS and AIFMD do have their own advantages, Buck warned that any future regulation of structured products needed to be carefully thought through and sensible for the industry to continue to flourish.