More performance data please!

I was pleased to see Gary Dale (Is there any value in structured products?) publishing performance numbers for his firm’s structured deposits and investments on this web site last week, especially as the numbers demonstrated positive returns, both in absolute and relative terms to deposit rates.

One of the long held criticisms of structured investments is that the pricing and performance numbers are not published in places that are easily accessed, or are accessed at all.

The people making these arguments often overlook structured funds which are required to provide investors with prices and performance.

This web site www.structuredretailproducts.com publishes performance data for the UK and it makes interesting reading. The average annualised return for matured structures striking in the five year period from December 2007 to the end of 2012 was 6.95%.

Perhaps not surprisingly, non-capital protected investments such as “kickouts” performed the best. They offer attractive returns and tend to perform well in stable or gently rising markets, offering equity-like returns that reward investors for putting their capital at risk – but may cap their upside. For the same reason, they tend to be more tax efficient too. According to SRP, non-capital protected products striking over the five years to 2012 delivered an average of 9.35% per annum. I realise that this is not a straightforward way of measuring performance, but it is a useful starting point.

Structures offering protection of 100% or more of the holder’s capital did not do as well. This is not surprising when you consider that purchasers are taking the same capital risk as deposit holders. According to the SRP, capital-protected products striking over the five years to 2012 returned an average of 3.21% per annum, which is still better than many deposit rates over the period during which base rate was cut to 0.50%.

These figures are measured across all providers who supplied data to measure performance, all underlying markets and all payoffs. Hence, there will be issuers who perform better and others who are not as good. This is true of any industry average.

One important question is what the benchmark for success or failure is -is it cash deposit rates or equity index returns; should it be price returns or total returns? I suspect the answer will depend as always on the client.

People who want capital protection and who may be investing away from cash for the first time may prefer deposit rates. While equity investors may be more comfortable with index returns, they are more likely to value capital protection (soft or hard) when stock markets are falling – realising that they have avoided the alternative, which would have been the loss of capital.

If we follow the fund management industry, the answer may lie in league tables, breaking the performance of providers and products into quartiles. I am not a big fan of measuring performance relative to competitors, as most people want absolute performance. However, this is the standard of the investment industry as a whole.

Firms have shown a willingness to publish price and performance information and Investec is a good example. However, until the industry as a whole embraces the concept, structured investments will still be viewed as the new kid on the block! We need more performance data, please!

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