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Auto-call Maturities in the Last Six Years

By Christopher Brown

Given recent talk about FCA reviews and investors apparently overestimating returns from structured deposits, those unfamiliar with structured products could be forgiven for thinking that these haven’t been good investments. Whilst it may be that the most recent FCA criticism was directed primarily at high street banks peddling poor value contracts, the IFA sector has produced some very attractive results over the last six years. Auto-calls have become one of the go-to structured products for investors in recent years, and not without good reason. Auto-calls typically produce defined simple gains on the back of only a small rise in the underlying measurement which, more often than not is the FTSE 100 index. These investments have performed well over the last six years, which clearly justifies why they are one of the most popular structures currently available on the market.

IFA


As the above table shows from February 2009 to 2015, of the 583 auto-call products that matured, 375 were linked to FTSE 100 Index only. 99.73% of all FTSE-only linked auto-calls matured on their first or second possible maturity date, with the remaining 0.27% maturing on their third observation. This translated to an average investment duration of 1.53 years after which point investors realised a gain on top of the return of capital, available for reinvestment. Furthermore, the average annualised return on FTSE 100-linked auto-calls within this period was 8.65%.

The remaining 208 auto-call products were linked to shares or multiple indices. 181 (87.02%) matured on their first or second possible maturity date and 97.11% within the first four observations. While this may appear less impressive, we would generally expect higher risk investments to be less likely to mature early than those linked to a single index such as the FTSE 100 and potentially produce higher returns. Indeed the product sub-set produced average annualised returns of 10.8%

Obviously past performance is not a guide to the future and the positive results from this product set are invariably a function of the favourable market conditions, which have obviously been exactly what the investors hoped for, whilst at the same time, typically protecting their capital from all but the most catastrophic market events.

Other investments have also benefited from the favourable market conditions but the defined returns nature of the auto-calls has means that expectations can be managed and the recent results will have led to some very satisfied investors.

With the FTSE having now exceeded its previous all-time high, it’s really anyone’s guess as to whether it will power ahead, retrace or languish. Obviously if the bull-run continues then whilst auto-calls could under-perform direct market linked investments, they will still achieve their best expected outcomes. In a flat or falling market, the maturities will be potentially delayed, but given that all that is typically needed is for the index to be at or above its initial level to trigger a maturity and coupons accumulate for each year the plan is in force, then a medium term dip in the market followed by a recovery could see auto-calls be amongst some of the best performing investments. In addition, there are a number of defensive auto-calls which can mature even if the market falls by a limited amount.

That said, it must be appreciated that disaster could hit the markets as a result of some as yet, unknown factor meaning that all such investments run until their final maturity dates and in the event that capital protection barriers, which are typically set at forty or fifty per cent below the starting index level, are breached the investment return could track the index giving rise to an equivalent fall at maturity. In addition the risk that counterparty could default also needs to be acknowledged as this could give rise to a significant or, in extreme circumstances, a total loss –however it is worth bearing in mind that some Lehman Brother’s investments have recovered 35% of their original investment to date.

IFA


Ultimately, examining the maturity results from auto-calls over the last six years demonstrates the potential to make attractive gains in uncertain market conditions. As you may expect, FTSE 100-only linked auto-calls have led the way in terms of locking in those early gains, but even those investors who were less risk-averse who invested in non-FTSE 100 only linked auto-calls also made attractive returns. While we always would advise our clients that structured products are not a total solution and should be part of a balanced portfolio, these results show that auto-calls are an effective investment that can be utilised in a variety of financial planning scenarios.