‘Behavioural Finance’ is a subject matter, worthy of an article itself, when looking deeper at the decision making on Investing and psyche that investors demonstrate during these processes.

Without hindsight, investors will tend to place most value on securing Capital and are far more likely to focus on the anxieties of falling markets/values than the happiness gained on the reverse! This has led to many investors avoiding the composure required and panicking by selling out early, missing out on future recoveries and gains.

Structured Products can provide many solutions to assist these such anxieties. To start with the most cautious Structured Products focus on the most basic/fundamental of trying to secure Full Capital Protection.  Like all investments there is no such thing as no risk, after all money in your pocket is being eaten away by inflation!

Structured Deposits have Full Capital Protection with the same Credit Risks and FSCS cover that are associated with Term based Savings, however they tend to use underlying market indices to provide a boost to rates of return.  For example, the IDAD (Barclays) UK & Europe Deposit Kick Out Plan Issue 2 offers a potential 8.5% pa growth return if both the FTSE 100 & Euro Stoxx 50 are level or up from Year 3 to 6 (unfortunately, this particular plan is now fully subscribed and closed but a new Deposit Plan will follow shortly).

Structured Product Plan with FULL Capital Protection with the same Credit Risks with that of the Issuing Bank in question, but no recourse to the FSCS cover as this is not in a Deposit structure. There aren’t so many of these types of Plans or indeed Deposits in the industry, however IDAD is one provider that is active in this space.

The IDAD Morgan Stanley Capital Protected UK & Europe Defensive Kick Out Plan – December 2022 carries a higher rate still of 9.45% pa, whilst being slightly defensive. This can show that pricing fluctuates all the time and so can present opportunism!  For more information on this plan click here.

Considering Structured Plans

Structured Product Plans with caveats, (Soft Protection), to Capital Protection, again carry the same Credit Risks, however, can provide higher potential returns above that of 10% pa plus! As an average, the caveat to Capital Protection is that the underlying indices have to be at 65% of their starting position or better at maturity, covering a fall of 35%!

As can be seen, the Structured Product industry has great appeal for investors. Therefore, it’s a case of investors valuing what they favour most, as follows:

FULL Capital Protection versus Soft Protection, even if that means adding an extra index, for example the Euro Stoxx 50 to assist with pricing?

Does an investor prefer an earliest Kick Out opportunity being at Year 2 as opposed to Year 3 or 4? Following on if an investor favours a decent rate would they prefer 4 years of that rate as opposed to 2?

How much value can be placed on a reasonable chance of at least securing your Capital over a specific timeframe as opposed to market solutions without the same market downside protection?

If a Structured Product captures a particularly opportunistic rate/value in a microcosm of time, is it worth having conviction, alongside your balanced Portfolios?

How much Value is placed on a Deposit type Structure having £85,000 FSCS cover?

Are the more defined return/known outcomes for specific market conditions delivered by Structures of greater value in these unpredictable times we are currently experiencing?

Soft Protection is still a sought-after caveat towards Capital Protection and therefore what level of protection to give up a rate for or indeed improve rates for? Covering for falls of 30%, 35% or 40% at maturity date only.

Don’t Forget the Risks

As with all forms of investment there are risks involved. Some plans do not guarantee to repay the money invested. The potential returns of the plans and repaying the money invested are linked to the level of the stock market and also depend on the financial stability of the Issuer and Counterparty Bank.  It is essential that investors read and understand the risks of the plan(s) which are clarified in the product documentation.

Past performance is not a guide to future performance and may not be repeated.  Investment involves risk. The performance data does not take account of the commissions and costs incurred on the issue and redemption of shares. The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested.  Because of this, an investor is not certain to make a profit on an investment and may lose money.  Exchange rate changes may cause the value of overseas investments to rise or fall.

The promotion of the plans does not constitute ‘advice’ to invest. Advice is always specific to an individual investor’s circumstances and needs, following the process of ‘know your customer’, with the aim of ensuring that any product is suitable for an investor.

As always, the recommendation and common sense approach is to consider product solutions as a portfolio, never over-exposing oneself to a point of financial pain and suffering liquid or counterparty exposure.

At the Best Price FS price point the IDAD Plans are certainly worthy of consideration for inclusion within investment portfolios.

Warmest Regards.

Best Price FS Team