In Thursday 23rd June’s referendum, a majority of Brits voted to leave the European Union (52% to 48%).
The outcome caused a ripple effect in the financial world, with the FTSE 100 dropping by 8.7% before recovering slightly to a loss of 4.9% on the morning of the 24th of June. The pound was also hit hard, initially dropping in value by almost 10% after the results of the referendum were clear.
Silver-linings
Since the weekend, however, the FTSE has picked itself back up, sitting now (28th June) at only 1.57% down from Tuesday of last week. And despite the rocky ride that’s likely to be ahead for the UK’s economy, many investors are seeing a silver-lining to the uncertainty. Due to a lower FTSE index, the investment that may now look increasingly attractive is Structured Products.
This umbrella term refers to a range of investments which place the investor’s money in a set of derivatives for a fixed term (usually 5-6 years). The investment is pitted against the performance of an index, such as the FTSE 100, and the predefined returns will depend on that index reaching or maintaining a certain level.
How Structured Products Work
When the Structured Product investment is placed by the holding company, a strike level will be recorded, which notes the level of the index on that initial strike date. This is what’s measured against at a later maturity date(s), and will dictate whether or not a return is provided. There will also be a requirement that the index has to stay above a certain level, e.g. 70% of the strike level observed on the investment’s strike date. This condition is what’s known as the capital return barrier, and if the index falls below this level then the investor will lose some of their original capital. See below for a more detailed example of this.
Why Now?
In all of this, the largest attraction right now for investors in Structured Products will be a low strike level, due to a floundering FTSE 100. With a low level at the investment’s strike date, one could argue that there is good potential for the index to be at or above the initial strike level when it comes round to maturity. The recovery by the FTSE 100 since the weekend may add credence to this, painting a more confident picture for investors into Structured Products looking at the long-term.
The Risks
This all being said, investors should bear in mind that any truly drastic drop in the FTSE 100 – a possibility, given our current economic uncertainty – could cause a loss of their original capital, due to their investment plan’s capital return barrier. During such times, the stability of the firms backing the investment presents a further risk. If they were to fail, then investors may lose their original capital in full. This is unless the Structured Product plan offers protection through the Financial Services Compensation Scheme (FSCS), which protects investments up to a limit of £75,000. It’s therefore important for investors to check whether or not their plan offers this.
An Example
Take the Mariana Capital 10:10 Plan (July, Option 1), for example, which offers a yearly return of 7.05%. The plan runs for up to 10 years, and because it’s what’s known as a kick-out plan, there’s an opportunity for it to mature at year 3 and for each subsequent year. This is so long as the FTSE 100 is at or above 90% of the level measured on the investment’s strike date. If so, then the 7.05% return will be multiplied by the number of years the plan has run for to calculate the return.
If the plan were to mature in 2021, the fifth year, then the investment return would be 5 times 7.05%, or 35.25%. For an investment of £30,000, this would represent a return of £10,575 on top of the investor’s initial capital. This is all as long as the index isn’t below 70% of that initial level when it comes round to a maturity date, at which point the investor will lose 1% of their capital for every 1% the FTSE has dropped below 70%.
Brexit and the Outcome
It still remains to be seen how the FTSE and the economy as a whole will fare over the next few weeks, months or even years. It’s therefore important for investors to take a long-term view before moving their money into Structured Products. However, the relative low of the index due to Brexit may present a good opportunity, particularly for investors who see a positive future ahead and who are prepared to take the risks each plan entails.
Find out more about our range of Structured Products. Visit Structured Products
This article is commentary only and should not be construed as financial advice. Investors should familiarise themselves with the risks inherent to each plan before investing.