Many IFAs use structured products as a matter of course when constructing client portfolios.
Others argue that they can replicate the effect of a structured product using other means. Some use them only for very specific situations where a degree of certainty is required within a defined timescale, while others rely on particular process platforms and only use what comes out at the end of the pipelines - a practice which typically precludes defined product solutions.
One thing is certain – there are many clients in the current investment environment who wish their IFAs had built more protection into their portfolio. In many cases, these are likely to be clients of IFAs who favoured commercial property as a time-honoured defensive holding, and would also have welcomed a better balance between performance expectations and risk management.
A product enhancement culture
In the last few years several providers have delivered a steady flow of investment product solutions often using the FTSE 100 or other indices as a framework for defining returns. These tend to be heavy on product specification with the underlying index less important than the detailed terms.
Now there are newer sorts of investments, offering ever more sophisticated links to less mainstream markets where the key factor is the market sector underlying the product.
Barclays Wealth - a leader in the market for protected investments - now offers a number of inventive solutions, including the Emerging Markets Optimiser (EMO). Now into its third issue, the EMO offers access to emerging markets through the iShares Emerging Markets MCSI Index Fund, an exchange traded fund managed by Barclays Global Investors. What sets this investment apart is its ‘Optimiser’ strategy, which is designed to manage exposure to the market by increasing participation when volatility is lower than expected, and reducing participation when volatility is higher. The strategy behind the Optimiser is based on the experience that rising markets tend to be associated with lower volatility and vice versa.
The level of participation is calculated daily by assessing volatility over the previous 20-day period. From the investor’s perspective this provides the reassurance that market turbulence – one of the potential issues for emerging markets investors - is managed through a sophisticated tool beyond the capacity of most providers. Furthermore this strategy is also designed to enhance performance in a market that is widely predicted to continue growing strongly for the foreseeable future. Lastly, the risk to investor’s capital is removed for all those prepared to remain invested for the full five-year term.
The EMO is aimed at IFAs who may advise on more esoteric sectors as a matter of course. But the capital protection it offers means it also suits IFAs who may not. In either case, advisers can offer their clients dynamic exposure to the performance of emerging markets while managing the capital risk.
For most clients the fact that these products assume a five-year commitment should be no barrier - few advisers would question the mid-to-long term horizon as the right approach for equity investment.
The latest development in the EMO is to complement the full 22 country diversified Global Option with a more focussed Eastern European Option investing in Russia, Poland, Hungary and Czech Republic.
The general demand for investment solutions such as these is that certain markets are attractive for their growth potential but are seen to carry downside risk as a corollary. Furthermore whilst there are a plethora of tools and analytical techniques available to help with fund selection, not everyone wants to add manager risk to sector risk. EMO helps manage the sector risk and enables the adviser and client to avoid the risk of choosing the wrong manager.
The commodities market
Commodities is an asset class where performance has been strong but where involvement from IFAs has been relatively low. In terms of portfolio planning, commodities can offer genuine uncorrelated diversification. Too many portfolios are spread across a range of funds and asset classes with too great a natural correlation.
By contrast, commodities do not tend to move in line with equities and so can offer a true alternative complementary holding. But the sector is not without its challenges. Access to certain commodity markets – coal, livestock, corn, wheat and soybeans for instance - can be difficult and the research base required to sustain an up-to-date knowledge of the individual markets that comprise the sector is onerous to say the least. People talk of a commodities market but in practice each individual commodity has its own market, creating more research demands for the IFA. The fact that several managers offer commodity funds does not remove this research burden - it simply transforms it into a requirement to research the managers and the sectors they favour.
Barclays Wealth own take on commodity investing comes in the form of Commodity Select. Linked to the performance of a carefully selected basket of commodities – including precious and base metals, agricultural and
energy - this product offers 115% participation in the growth of the basket. The basket selection is broadly based on the S&P GSCI index, but weighted by Barclays Wealth to reflect its views on the each component of the asset class. Importantly, Commodity Select offers full capital protection at the end of the five-year investment period, so for the client with a five-year horizon it offers upside potential without capital risk.
For full details of these offers go to www.barclaysinvestors.com/ifa
