Max Darer, Lowes Financial Management, 29/03/2023
2022 was a captivating year for UK retail structured products, with total issuance having increased with a notable increase in deposit-based contracts. A structured deposit provides surety of a return of capital, with FSCS protection and will typically pay a fixed or variable interest payment dependent on the position of the defined underlying measure, often the FTSE 100 Index. Investec had been the predominant issuer of structured deposits in the UK for many years and following their exit from the market in February 2021, other sector participants have stepped up to fill the gap. A total of 72 deposit-based structured plans were issued in 2022 from seven different providers compared to just 46 plans issued from five providers in 2021. Already in 2023, 46 deposit-based plans have been issued by six providers.
In 2021 Lowes did not favour any deposit plan issued in the retail space but in 2022 we marked 18 new issue deposits as ‘Preferred’. 2022 saw the introduction of one particularly simple deposit shape being fixed income deposit plans. These are very similar to fixed term deposits with terms of four or five years, during which time they pay a fixed income and the potential for an added bonus at maturity if the underlying is higher. With interest payments offered being as high as 5.5% per annum plus potential bonus, these plans have been the best deposit offerings available for over a decade. As for 2023, there have been four fixed income plans released so far, none of which have impressed as much as those seen at the end of 2022. However, eight deposit plans have been marked as ‘Preferred’ so far.
The rise in structured deposits has been welcomed and is more encompassing to a wider range of investors. Of course, a deposit-based plan accepts a significantly lower level of risk than a capital at risk plan by providing protection against market and counterparty risk, but it has been the rise in the return aspect of the plans that has brought them back to the light and even made them a viable alternative to some capital-at-risk plans. In 2021, the average annualised return of maturing deposit plans was 2.13% - in 2022 we saw new issue structured deposits offer fixed returns of more than double this, and contingent returns of more than three times.
One of the fundamental benefits of structured deposits is the layer of protection offered through the Financial Services Compensation Scheme (FSCS), protecting up to £85,000 per bank, per individual. This is what fundamentally differentiates a deposit-based plan from a capital-protected plan, the latter does not protect the investment from a failure of the counterparty.
2022 saw a peak inflation figure of 11.1%, well over five times the Bank of England’s target rate of 2%. With tightening monetary policy since December 2021, the Base Rate rose from 0.1% to 4.25% with the stance that rates must remain high until inflation is under control.
All else equal as interest rates remain elevated, structured deposits will continue to offer attractive returns, something we are very much looking forward to seeing play out in 2023, securing them a place in many a portfolio.
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