02/10/2024

Once described as ‘spread bets on steroids’, in the last decade 58 share-linked structured products were issued in the UK retail space, the last being released in 2023. These structures are those on the higher end of the risk scale and arguably highly speculative and as such may have been used as a small portion of client portfolios. For some advisers, managing higher risk portfolios, these may have been the only structures they entertained, whereas others with a lower risk approach may have avoided all iterations of them.

By their very nature, in terms of maturity outcomes share-linked structures have represented some of the best and worst performers and in this article we explore the extremes.

In the UK retail space we have seen various iterations of share linked structures using baskets of shares of varying sizes. Whilst the outcome will typically be dictated by the worst performing share, we have seen some that, for example track a basket of ten blue chip shares but disregard the worst performing three, which of course reduces the risk albeit these have been rare. More commonly they have been baskets of just three to five individual shares and these have led to some eye-watering potential returns on offer.  

One of the highest coupons offered was 34.5% per year! This autocall required the share price of GlaxoSmithKline, Vodafone and Barclays to be at or above the initial levels on an anniversary to trigger a maturity. Given the headline coupon and the household names this was something that may have tempted even the most risk averse to consider allocating a small percentage of their portfolio. Beyond counterparty risk, this investment was at the mercy of the worst performing of the three shares and would track the fall in such if it was more than 50% lower at the end of the term. As it was, for this structure, a positive maturity was not triggered and whilst at the start of the pandemic a loss looked certain, Barclays share price recovered just enough over the next few months to give a maturity returning the original capital.

Other share linked structures haven’t been so fortunate with six maturing, returning less than 40% of original capital at the end of the maximum term, despite most of these having a defensive or step-down feature. Of course, when tracking individual shares there is the potential for a total loss where unlike a mainstream index the underlying value could fall to zero. Fortunately, we have not witnessed any of the shares utilised in UK retail contracts do so.

The table below shows the best and worst share linked plans maturing in the last decade.

Start Date

Potential return

Share Link

Actual Term

Counterparty

Final gain/loss %

Annualised return

April 2014

3.875% per quarter held

HSBC, M&S, BAE, Anglo American, IAG

6

Morgan Stanley

-78.17

-22.37%

May 2014

4% per quarter held

HSBC, M&S, BAE, Anglo American, IAG

6

Morgan Stanley

-77.49

-21.97%

September 2012

4.5% per quarter held

AstraZeneca, Anglo American, Shell, Sainsbury, Aviva

5

Royal Bank of Scotland plc

90

13.69%

December 2012

18% each year held

BP, Tesco, Aviva

5

Royal Bank of Scotland plc

90

13.69%

October

2014

30% after year one and 15% per six months held thereafter

GlaxoSmithKline: Vodafone:, Barclays

2.5

Morgan Stanley

75

25.07%

 

At an overall view in the last 20 years, of the 102 capital at risk share-linked UK retail autocall maturities, 70 returned a gain, 14 returned capital only and 18 returned a loss. Comparatively, over 2000 capital at risk FTSE linked autocalls matured realising an average annualised return of 7.62% over an average 2.2 years – none returned a loss and 13 returned capital only.

A 69% positive hit rate on share-linked plans may not seem like a bad deal given the double digit annual returns offered, however in the context of the sector’s mainstay, where 99% realised a gain with an overall higher average annualised return it may be best to stick to the ‘boring’, proven track record investment that is a FTSE linked autocall, or perhaps dual index plans which have enjoyed 97% success with higher returns.

 

 

Structured investments put capital at risk.

Past performance is not indicative of future results.