'Win-win' strcutured funds are too good to be true
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Senior Writer
Jody Clarke Nov 06, 2009
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Structured products are marketed as a win-win. Most claim to offer exposure to a rising stockmarket plus a promise to preserve your capital should the stockmarket drop, so it's no wonder they have been flying off the shelves. According to StructuredRetailProducts.com, sales in Britain grew by 25% year-on-year in 2008 – to reach £9.68bn. But that does not make them a good investment.
"I haven't come across many clients who have made money from structured products," says Anna Sofat of Addidi Wealth Management. She particularly dislikes the lack of clarity on costs: "there is a sense that the only people making money from them is the banks. They will never lose, no matter what happens. But for clients, there are lots of whats and ifs."
Take the Emerging Markets Optimiser from Barclays, a five-year plan that promises to return your capital, plus 90% of the rise in the iShares MSCI Emerging Markets Index Fund. Sound good? Beware – there are many catches. First, if at maturity in five years' time the market is down, you just get your original capital back. That's a zero return over five years, plus you'll have received no dividends.
And your investment is only as safe as the bank providing the guarantee. The 5,600 British private investors who lost over £100m on structured products backed by Lehman Brother's probably thought their money was safe. But the Financial Services Authority recently confirmed that many of these products may have been mis-sold as "guaranteed" or "100% protected".
As ever, it's "the people who are manufacturing and selling these products who are making shed loads of money", notes Peter Hargreaves of Hargreaves Lansdown. He is wary of their opaque structure, not to mention finite shelf life: "when they mature, even if it is a lousy time to liquidate, you still have to". "The number one rule is: don't buy anything you don't understand." So, what's the alternative?
As the rest of the market has rallied, income stocks have stayed put, notes Hargreaves. "You can now get two or three times the rate you get on deposit with the potential for growing income and capital growth." He tips the JO Hambro UK Equity Income (020-7484-7484) fund. Managed by Clive Beagles, it's up 40% over one year. It has an expense ratio of 1.44% and a 4.7% yield.
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