Industry benchmark required!

In my last blog I called for more performance data, which will still be welcome. However, to make structured investments truly comparable, an industry benchmark is needed. The recently published principles from the European Securities and Markets Authority (Esma) and the European Banking Authority (EBA) on benchmarks will lead to greater scrutiny but the increase in transparency should be worth it!

When looking at the returns from data, I thought they looked good relative to more traditional asset classes.

The problem is how to measure performance over the same period as very few structured investments will have started and finished on those dates. The answer is more straightforward for open ended solutions and less so for closed ended or tranche-based investments.

The question is how do you compile such an index?

Comparing payout performance?
This is the simplest solution and the one that most structured investment providers might use. Taking the actual payout of a product over its lifetime works well for tranche-based launches with a defined marketing period (usually prior to launch) and fixed terms. It is also relevant because it tells investors what they would have received had they bought a specific product at inception.

The difficulty is that most structures have different start and end dates. It is difficult to find products that strike and mature precisely at the year end. So for the purposes of this blog, I looked at structures in SRP’s UK database striking over the three months before and after the end of 2009 and maturing in three months preceding and following the end of 2012.

According to SRP, they returned on average 7% per annum (with the usual caveats about past and future performance). The fully capital protected products delivered an average annualised return of 5.1% per annum. That was a lot better than the base rate and comparable with the overall performance of the balanced funds sectors*; whereas, with the non-capital protected structures earned on average 10.4% per annum, which compared favourably with the overall performance on the all equity and equity income sectors*. Very respectable I would suggest. The problem is that only 11 structures fitted into the sample with those widely drawn start and end periods. Whilst most products in the UK run for longer terms, the numbers of issues were broadly the same for five years too. Hence, it could prove difficult to compare results with funds, for example, for any given twelve month period -unless providers start to use more defined start and end dates for measuring payoffs as exchanges do for listed futures and options.

Comparing price performance?
The traditional measure is taking the price of an investment at one point in the past and comparing it with the current value. This is not a problem for open ended structures which have very similar characteristics to traditional funds.

There are a number of issues for tranche-based products including but not exclusively:

  • Gathering price data over the life of the product (unless this is already published)
  • Prices can only usually be traded during the marketing period at the inception of the product
  • Valuing structured deposits mid term
  • Treatment of products with different terms e.g. one, three or five years

However, I am sure that these concerns can be overcome to provide an effective benchmark.

Simple average or volume weighted?
The question arises as to whether to use volume or equally weighted numbers or not? Fund data is based on portfolios of assets with asset allocations determined by the manager. Therefore, performance weighted by net asset value is relevant for traditional funds whereas structured investments tend to be sold on an execution-only basis with the customer not the provider determining the volumes for each tranche. Hence, a volumes weighted methodology may be less appropriate for structures.

Who could develop a benchmark?
There are a number of providers of performance data in the investment and derivatives markets such as Morningstar, Markit or Bloomberg. In the structured investments industry, SRP could be a leading contender with a massive database of products across the globe. Certainly the roles of administrator, calculator, submitter and publisher will come under greater scrutiny following the introduction of the Esma/EBA principles on benchmarks.

Why stop at performance data?
The derivatives industry also publishes an operational benchmark report which could provide investors, advisers, participants and regulators with greater comfort as to how well the industry is run. How about a similar report for structured investments?

There will be times when the results do not look so good and every sector of the investment industry has to live with these from time to time. Market participants and – more importantly – the media and other commentators need to recognise this. They judge other sectors over the medium-long term and the same rule should apply for structured investments. Any improvements in transparency must be recognised as such.

However, all of these issues considered, an industry-wide benchmark that is comparable with other investment sectors can only be a step forward for structured investments!

* Source: compounded returns for unit trusts and open ended investment companies in 2010, 2011 and 2012 from

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