Published 25 August 2009
Before I jump right into try to answer this question, let me first explain what they are.
What are they?
Listed structured products are tradable exchange-listed products issued by Barclays Bank Plc. The first of these were launched less than three years ago so they are a relatively new form of investment.
Structured products, distributed by Barclays Stockbrokers, are tradable on the London Stock Exchange (LSE). This ability to buy and sell them without penalty throughout their term, as well as the availability of a daily valuation, adds greatly to their flexibility, puts the investor in control and differentiates them from structured products provided by some other issuers which "lock" investors in for the whole investment term.
The importance of the underlying
First and foremost they are essentially trackers with some "bells and whistles" attached. They are designed to follow the performance of indices, sectors, commodities and even baskets of shares. The asset they track is referred to as the underlying and the performance of the investment will largely be dependent upon the performance of the underlying.
I think one of the reasons why investors do not more widely recognise the value of these structures is down to timing. When these products were first issued, the world’s indices were generally at much higher levels than they are currently - the FTSE 100 for example was above 6,000 compared to approximately 4,800 at the moment and any tracker is going to suffer when the market they are following falls.
The position is very different now. This is best demonstrated by the current valuations of the structures quoted on the LSE. Each listed structured product is issued at par (100p). All of the early products currently trade below this figure whereas the vast majority of the more recent issues are trading above par. This is not a problem with the products themselves, just evidence that markets have fallen from their peaks, in some cases quite considerably. It is best to buy into markets that are weak and cheap as opposed to strong and expensive…..the problem here however is that you can only really see this with certainty with the benefit of 20/20 hindsight!
The next important feature to note is the term or life of the issues. To date, these have been launched with terms of three, five or six years. An important point here is that in order to be ISA-eligible, the product has to have the “potential” to run for five years from the date of issue. Accordingly a five year listed structured product would not be ISA eligible if purchased after the initial offer period (i.e. in the secondary market) and a three year note would never be eligible.
The key word here is potential. For instance the FTSE 100 Defined Returns Note (B024) was an ISA-eligible investment if purchased in the initial offer period as it had the potential to run for five years. However, the terms of the product dictated that it would be repaid early if on any one of its four anniversary dates the index it tracked (the FTSE 100) was equal to or higher than the starting level (initial index level). Should this occur, then the product would be redeemed, giving a return equal to your capital back plus 13.5% for each year invested.
The initial index level of the FTSE 100 was 4,034 and at the time of writing it stands at approximately 4,800 and so, as things stand now, this investment will be repaid on its first anniversary (17 February 2010) with a profit of 13.5%.....a good return from a low-risk investment during a year when interest rates have been at record lows! However, should the index fall back below 4,034 before the anniversary date, and remain below that level on 17 February 2010, the investment would continue to run – until at least the next anniversary, 17 February 2011.
Each structured product has its own specific terms. These are the "bells and whistles" referred to above and they can be a combination of leverage, protection, fixed returns and value caps. The best way to understand the differing terms for each of the 31 products issued to date is to review the term sheet which can be found on the LSE Listed structured products page. Investment caps and fixed returns are, I feel, self explanatory and I touch on these in a moment anyway, but I think I should first say a few words on the leverage and protection elements sometimes available.
FTSE 100 Accelerated Returns Issue 3 (B025) which provides fives times leverage but returns are capped at 100%. Although the cap is of course a limiting factor, this type of product demands consideration as a 100% return over a five year period is something I would settle for every time. For this structured product to achieve the cap the FTSE only has to rise by 20% and inside an ISA or a SIPP it would also be tax free! (bearing in mind the ISA eligibility rules I mentioned above)
Protection is one of the most valued attributes of these products. In this context the ‘protection’ can be total (i.e. repayment at par on maturity) or alternatively repayment at par on maturity under certain specified conditions, for example as long as the index doesn’t fall below a specified level at any point during the term of the note. In addition you should bear in mind that any protection given is only as effective as the protector - in these examples Barclays Bank Plc (AA-/AA3). The actual and perceived ability of the issuer to meet its obligations at any time can affect the market value of the investment and if the issuer fails to meet their obligations you could get back less than you invested.
I have said that one of the unique selling points of these products is their structure allied with their tradability which adds greatly to their flexibility. It has to be said at this juncture that the terms of the notes are only valid if held for their full term. This means that even a note that is designed to return your capital may lose you money if you sell it before the end of the term when the market price is below 100p. It also means that if you buy the note after its initial offer period the protection and its other terms may well be different. If it has risen in value since its launch and you purchase above par (above the 100p issue price) . If the price has fallen since launch and you buy it at less than par, then the original protection terms will be enhanced.
This brings me to another very important point. Although the original terms and protection are only accurate as stipulated if purchased in the initial offer period, or in the secondary market at par, there is no doubt that the protection and other factors affect the price throughout the term of the note. A great example of this in terms of protection is the Global Financial Services Note (B011). The investment date for this was 29 August 2007 and it tracked a basket of shares in 10 of the largest financial services companies in the world. This investment date was of course very early in the now infamous 'credit crunch’ and banking crisis and this note tracks a basket of shares which includes Citigroup, Bank of America, UBS and RBS! You will be able to plot a graph which shows you what happened next by going into the charting section of the website.
The graph example above tells you far more about the protection element of a note than I could ever say. Why has the red line (the structured product) largely held its value when the other lines have fallen dramatically? The answer of course is because of the total protection afforded by this note. Yes it would be showing you a loss if you sold at the end of July but this would be miniscule compared to the massive loss you could have incurred had you invested direct in RBS, for example, and even small compared to the loss you would have incurred in the bank sector generally over the same period. The note has not held its value entirely but could have saved you a fortune! Yes the protection depends upon the ability of the issuer, in this case Barclays Bank Plc, to meet it liabilities and will only be fully effective if the note is held over the full term, but this graph tells you one thing for certain - it can and in this case has, beneficially affected the price of the note during its term.
I firmly believe that structured products can play a vital part in your investment portfolio. Successful investors always evaluate the balance between risk and reward and try to find opportunities that offer growth prospects which they believe are positively disproportionate to the risk taken. The clear investment objectives laid out in the terms of these products help the investor to do this relatively easily and the ability to buy and sell them in the secondary market adds an invaluable element of flexibility. Another potential benefit of structured products is the underlying asset tracked can add an attractive element of diversification either on a geographical basis or by introducing different asset classes.
These notes are qualifying investments which can be held in an ISA (provided you observe the five year rule previously referred to) or within a SIPP. On the subject of the latter, fully protected notes are ideal to use when you are approaching retirement to help add a measure of stability to your portfolio (as illustrated in the chart above) when you need it most. One downside is the loss of the dividend income where it tracks an equity index but you may feel in certain situations this is a small price to pay for the leverage and the protection provided.
Keep your eyes open for new issues which are introduced on a regular basis and published on our website.
I hope you find these notes as interesting as I do and good luck with your investing!
Page last updated: 26 August 2009