Q3 Maturity Results

With the effects of the preceding periods still hitting hard, not least Q1 2020, Q3 has seemed to be something of a non-event for markets, with the FTSE 100 Index beginning at 6,169.74, and, after a short rally, finishing the quarter at 5,866.10, representing a fall of 4.92% across the three months¹.

In terms of product maturities, the first two weeks of Q4 have encapsulated the highs and the lows of Q3, with some extraordinary performances – four Lowes ‘Preferred’ plans have matured earning average gains of 61.98%. Whilst Q3 proved to be somewhat quieter in comparison, there remain several comment worthy points to address…

42 products matured in Q3, five more than the in the previous quarter, though 66 less than in the primary quarter. As in Q2, many products failed to mature at a gain as they had struck at higher index levels than those at the maturity observation dates Of the 42, just five were autocall / kick-out contracts. The remaining autocalls that had the potential to mature during the quarter have seen their maturity deferred until next , or subsequent observations. Given that the potential returns for autocalls improve with each year that passes, with their potential for these to ultimately, significantly outperform the markets improves each year.

Of the 42 maturities, half matured achieving a positive outcome for investors, despite ongoing market turmoil. A further 18 plans simply returned original capital, albeit having protected it from market falls, which many were double digit percentage falls. Three of the 42 maturities resulted in a capital loss for investors. These were share-linked plans that we have alerted to previously as expecting to mature with a loss.

Q3 2020 maturity results. Source: StructuredProductReview.com

Q3’s maturing plans earned investors’ an average annualised return of 1.6% across an average term of 5.88 years, and there was a steep contrast between the annualised returns shown by the upper and lowermost quartiles. No Lowes ‘Preferred’ maturities realised a capital loss.

The three plans that did realise a capital loss for investors resulted in average annualised loss of -12.48% over an average 6 years. Losses linked to share-linked plans are continuing to be a repeated theme amid more depressed market conditions. The inherent volatility in these plans is proving to be detrimental to returns for the sector.

Details on the three loss-making plans can be summarised as below…

1. Mariana Capital 7 Out of 10 Stock Kick Out Plan. This plan matured returning just 28.54% of investors’ original capital due to the unfavourable performance of BT, with the share finishing the term 71.46% down.

2. FOCUS Structured Solutions FTSE 4 Quarterly Income Plan September 2014. This plan matured returning just 30.72% of investors’ original capital as a direct consequence of Standard Chartered’s share price falling 69.28% over the term. This plan did however pay a regular income throughout the investment term, totalling 22.5%.

3. FOCUS Structured Solutions FTSE 4 Quarterly Income Plan August 2014. This plan matured returning just 32.06% of investors’ original capital, again, as a consequence of its worst performing underlying share, with Standard Chartered’s share price falling 67.94% over the investment term. This plan also paid a regular income throughout the investment term, totalling 25.96%.

However, there were some big hitters! The best performing maturities this quarter were as follows:

1. Reyker Securities European Supertracker Plan August 2014. This was a supertracker, offering ten times the rise on the Euro Stoxx 50 Index, capped at a maximum potential return of 85% over the course of six years. Because the Euro Stoxx 50 was more than 8.5% above its initial index level, investors received the maximum return possible; at an annualised rate of 10.78% over six years.

2. Investec Defensive Enhanced Returns Plan 1 – Option 2. This plan matured despite the Euro Stoxx 50 Index falling over its term. This plan returned 60% over a course of six years. An annualised return of 8.14%.

3. Three separate issues of the Meteor FTSE 5 Monthly Income Plan 2014 (July, August, and September) matured having provided consistent income over a span of six years. These plans achieved annualised returns of 6.78%, 6.38% and 6.46% respectively.

Continuing a theme present with previous quarters, none of the loss-making plans have been linked to the performance of the FTSE 100, or any other major stock market index. The FTSE 100 Index, as it has been for quite some time throughout the sector, was the most common underling to the Q3 maturities, accounting for 45% of maturities.

The government has introduced a new traffic light system for lockdown measures and there are growing talks of further lockdown, meanwhile a Brexit deal hangs in the balance for Q4 - this could certainly be an eventful quarter with so much uncertainty yet to be addressed ahead.

Q3 did see the introduction of a new Index designed specifically for structured products - the FTSE Custom 3.5% Synthetic Fixed Dividend Index (FTSE CSDI), an Index we expect to become a staple within the sector over the coming years.

The FTSE CSDI aims to closely replicate the performance of the same 100 companies as the FTSE 100 Index, but after including the dividends – the equivalent to the FTSE 100 ‘total return’ index, from which, a constant annual dividend of 3.5% is deducted. The FTSE CSDI index may therefore be expected to perform in a similar way to the FTSE 100 Index although, it would be expected to slightly underperform the latter if the total dividend yield transpires to be less than 3.5%. The correlation of FTSE CSDI to the FTSE 100 over a 10-year simulated back-test is 99.97% (Mariana Capital).

By removing the uncertainty of managing future dividends, the issuing banks may face lower costs and risks. The risk, or even the expectation that dividends will be lower than 3.5% is, in turn, accepted by the structured product investor but the acceptance of this, together with the cost saving arising from the issuer not having to make assumptions on the dividends, ultimately leads to greater potential returns for the investor.

The latest issue of the Mariana Capital 10:10 Plan utilises the FTSE CSDI Index as underlying. For more information on the Plan, please click here. For more information regarding the FTSE CSDI, please click here, or visit the 10:10 Plan literature.