You win some, you lose very few...

According to negativity bias, humans are innately pessimistic – we are affected more by negative experiences than positive ones and subsequently there is a tendency to dwell on negative information even if presented with equivalent positive details (Vaish et al., 2008).

Notwithstanding the fact that the notion offers an explanation to an array of human behavior, negativity bias can be applied to investing in particular. Would-be investors can be easily deterred by adverse investment results, even if outnumbered by ‘positive’ outcomes - not least with structured products. Resultantly, we feel responsible to display the negatives, and where possible offer an explanation, particularly where losses have arisen…

Between 1st January 2010 and 31st August 2020, 69 UK retail structured products matured giving rise to a loss; 1.7% across a universe of 4,067 maturing plans. 9.81% matured returning investors’ original capital only, and 88.49% matured returning a positive result for investors.

Over this time, the 69 loss making plans returned an average annualised return of -6.56% across an average five-and-a-half-year term. The average total loss to capital arising from these maturities was 27.75%. 73.91% of the plans maturing at a loss reached their Final Index Date before 2017, with 60.87% maturing between 2010 and 2015.

All of the five FTSE 100 linked plans to mature with a loss commenced prior to the financial crisis. One, a multi-counterparty contract, suffered a loss of 3.77% as a result of the failure of Lehman Brothers. Three others matured with smaller losses arising from mid-term restructuring by the provider, Legal & General, in an attempt to mitigate what they viewed to be an increasing risk of counterparty default following the collapse of Lehman Brothers. Only one FTSE linked plan suffered a loss as a result of market movements which saw its American (intra-term) barrier breached at the height of the financial crisis, and as at the end of term the Index was still below its Initial Index Level (down 8.39%) a corresponding loss arose; an equivalent European (end of term) protection barrier would have protected this plan against these adverse movements.

Eight of the other loss-making plans were linked to an alternative single index, seven of them were linked to the Nikkei 225 Index or the Euro Stoxx 50 Index, all of which commenced prior to the financial crisis. Much like the previously mentioned FTSE linked loss-making plan, if these plans had incorporated an equivalent European protection barrier no losses would have occurred. The other plan matured in 2020 and was linked to the S&P GSCI Crude Oil Excess Return Index, returning just 25.11% of investors’ original capital.

It is noteworthy that the last new issue capital-at-risk plan to deploy an American protection barrier was issued in July 2017, with European barriers rising to absolute dominance across capital-at-risk products since then – a positive development within the sector enjoyed over the last decade.

22 loss-making maturing plans were linked to more than one market index, with all but four commencing prior to the financial crisis. Each of the four plans that struck in 2011 were linked to Emerging Market or Oil indices – the likes of which have since become rare in the UK retail space.

Of the remaining 34 negative maturities, 17 were linked to performance of commodities, and the other 17 were share-linked plans. Such plans are inherently riskier as a function of the underlying on which the performance of the plan is based typically being more volatile. Since 2014, the number of new issue share-linked plans in the UK retail space has plummeted – likely symptomatic of the changing regulatory guidance issued by the FCA surrounding complexity and transparency; further details can be found in Lowes’ Review of the Decade.

The Review of the Decade: 2010 -2019, produced by Lowes Financial Management, compiles extensive research into the significant positive steps for the UK structured products industry has made over the last decade. To obtain a copy, please click here.