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The Auto Put

Josh Wynn, Lowes Financial Management

‘See that ye be not troubled: for all these things must come to pass, but the end is not yet.’

July saw the reappearance of an inauspicious omen – a sign of the times – the first auto put plans in the UK retail space since 2013. The auto call’s pessimistic twin, these plans rely on falls in the underlying indices to generate positive returns. For example, the index/indices may need to be at or below 100% (rather than above) the initial index level on one of the plan’s anniversary dates to generate positive returns.

No one can be certain about the future, but it is feasible that, perhaps due to some Trump/China/consumer credit-related misadventure at some point in the next six years, global indices might follow a downward trajectory. Auto put plans, unlike auto calls, are built to capitalise on such downturns, whereas auto calls profit to a greater degree on the long-term growth of equities; the latter is regarded by-and-large as the more reliable of the two strategies and so auto puts remain extremely rare.

With current economic uncertainties taken into consideration, the auto put could be advocated as an expedient tactical move, although it is likely to be completely at odds with the overall strategy of any structured products portfolio (since, as I have said, all other plans in the UK retail space count on opposing fortunes). However, there are some other criticisms to be levelled. Firstly, there is the question of potential downside; an auto put with a 140% barrier would begin to lose investors’ original capital if the underlying indices were 140.01% of their initial levels, and with potential for total capital loss. On the other hand, an auto call plan linked to the FTSE 100 Index might have a barrier of 40% below the initial index level, but the FTSE would have to fall to zero points for investors to lose all their original capital, whereas an auto put striking at 7500 would need the index to be at 15000. Neither outcome seems likely, but I would hazard to say one has a greater probability of occurring than the other.

Secondly, all three retail auto puts launched in the past five years have been linked to more than one index, the FTSE together with either the DAX or S&P 500. Although the performance of global equity markets is generally positively correlated, having multiple indices relies on investor confidence being low in multiple regions – so anyone counting on one of these plans for their own bit of Brexit Dividend is far from assured of it.

In short, whilst these plans may have a place in some larger investors’ structured product portfolios, and are certainly rare enough to be called innovative, so far, we have not granted them our ‘Preferred’ status. Plans we have helped to design, such as the Mariana 10:10 and Investec / Lowes 8:8 plans, are built around the cornerstone which is central to many investments: that the long-term growth of equities is a more reliable source of gain than market pessimism.