Q4 2020 Maturity Results

Josh Mayne, StructuredProductReview.com

Throughout Q4 markets enjoyed a steady recovery as we approached the festive period, with the FTSE 100 Index having risen 9.88% from 1st October 2020 to 31st December 2020¹.

Despite the autumnal recovery, the long-lasting impact of the Q1 crash meant that a significant list of autocall plans that had the potential to mature in Q4, and in 2020 more generally, failed to do so as a function of the lower market levels. These of course have seen their maturity deferred until next, or subsequent observations where the potential total return will be higher. There were 60 less maturities in Q4 than in 2020’s primary quarter, leaving just 48.

Half of these maturities realised a gain for investors, including some sensational returns. A significant proportion of these (18) matured simply returning investors’ original capital, protecting the capital at maturity from the market fall. Five further maturities however, breached their capital protection barriers and as such, realised a capital loss for investors. These losses were share linked plans that we had forecast were likely to mature at a loss, long before the pandemic but the resulting negative impact on the market, admittedly made matters worse. Whilst the remaining 25 maturing plans matured successfully, some very impressively, the sector average performance for the quarter was dragged down by the above. The 48 maturities achieved an average annualised return of 2.44% across an average term of 5.65 years.

Fourteen maturities had been granted Lowes ‘Preferred status, meaning that we had believed them to have the most attractive terms at the time of launch. Lowes ‘Preferred’ maturities achieved an average annualised return of 5.66% across an average term of 6 years – an average annualised return more than double the sector average. 78.57% of Lowes ‘Preferred’ maturities realised a gain for investors, and the remaining 21.43% returned invested capital in full; none of the loss-making maturities were granted Lowes ‘Preferred’ status.

Q4 2020 maturity results. Source: StructuredProductReview.com

As indicated above, Lowes ‘Preferred’ plans outperformed the wider sector in all instances in Q4. Seven of the Quarter’s ten best performing plans were Lowes ‘Preferred plans, whereas not one of the ten worst performing plans were ‘Preferred’. The three best performing plans under review are outlined below…

1. Investec Defensive Enhanced Returns Plan 3 – Euro Stoxx 50 Version (Investec Option). This ‘Preferred’ plan offered investors a gain equal to the higher of 95% or the rise in the index at maturity (subject to six-month averaging). The plan matured after six years with a gain of 95%, or 11.76% per annum, despite the Index being just 1.73% above its initial level.

2. Investec Defensive Enhanced Returns Plan 2 – Euro Stoxx 50 Version (Investec Option). This ‘Preferred’ plan offered investors a gain equal to the higher of 87% or the rise in the index at maturity (subject to six-month averaging). The plan matured after six years with a gain of 87%, or 10.99% per annum, despite the Index being just 5.9% above its initial level.

3. Reyker Securities European Supertracker Plan October 2014. This plan offered investors a gain at maturity equal to ten times the rise in the Euro Stoxx 50 Index, capped at 86%. At maturity, the Index closed 9.2% above its initial level and therefore achieved a gain of 86%, or 10.88% per annum.

However, as previously mentioned, five share linked plans matured realising a capital loss for investors: an average annualised loss of -7.06% across an average term of six years.

These plans deployed ‘Worst of’ strategies, whereby the final gain and capital return is determined by the worst performing underlying share, irrespective of the overall performance of the basket of shares. Three of the loss-making plans suffered due to the adverse performance of Standard Chartered plc, though this was of little surprise to us...

In 2016 we published a research paper, ‘A Share of Underperformance’², in which we reiterated the risky nature of investing in share-linked ‘worst of’ products. In the piece we refer to a list of ‘dogs of the stock market’ that regularly featured in share-linked plans – not least Standard Chartered plc. At the time of writing all but 2 of the Standard Chartered plc linked plans were under water, making for a pessimistic forecast which in many cases has materialised. Whilst the effects of the market crash earlier in 2020 had no doubt hindered any hope of recovery for these plans, they were struggling as far back as 2016!

An investment that derives its performance from the share price of single companies, rather than an Index, is significantly more speculative and the risks associated should be firmly understood prior to investment. We would like to reaffirm that none of the loss-making plans were granted Lowes ‘Preferred’ status at the time of launch.

Consistent with the highs and lows of 2020, the sector enjoyed some standout performances, for better, or for worse. As we enter in the new year, we hope to see continued market correction and a degree of normalcy restored!

We will shortly be publishing our Structured Products Annual Performance Review 2021, which covers all intermediary distributed products that matured in 2020. To sign up to receive a copy, please click here.

1. FTSE 100 Index data sourced from Investing.com