Over the previous decade Lowes Financial Management have been consistent in our advocacy of an extended maximum investment term for new issue autocall structured products. In our Retail Structured Product Review of the Sector 2010 – 2019 we outlined several crucial developments enjoyed by the sector, including the extended maximum investment term of capital-at-risk autocalls. By way of illustration, between 2010 and 2015 no capital-at-risk autocalls released into the sector had a maximum duration of over six years, whereas by 2019 84% of all new issues had a maximum duration of more than 6 years.
However, over the last year there has been a significant re-emergence of autocall products being released into the UK retail space with reduced maximum investment terms of not just 6 years, but 5 years.
Whilst we can only speculate as to the causation of this trend, we can observe correlation, and it appears as though issuing banks are increasingly erring on the side of caution when hedging their long-term risk following the market correction of 2020. The first 5-year maximum term capital-at-risk autocall issued since 2015 was in late 2020, and since then a further 68 autocalls with a maximum term of 5 years have been issued.
In our view, this recent trend is potentially problematic for the sector because the move to a longer maximum duration autocall contract repositioned the investors’ exposure to market risk in the event of a market downturn in the early years, perhaps as a result of another black swan event. The extended maximum term allows a longer period for the underlying to recover under adverse market conditions and the impact of snowball coupons meaning that the gain achievable will increase year on year.
Of course, conversely, a shorter investment term allows less time for a market recovery with fewer maturity observations and a restricted scope for the accumulation for snowball coupons. Regardless of the ultimate outcome, the peace of mind of having, say, eight years for a dramatic downturn to recover, versus just three could prove very comforting.
In summary, it is fundamentally our view that common sense should prevail here; the longer a plan has to run, the greater the chance of positive maturity through recovery in the event of a market crash, whilst benefiting from snowballing coupons. Those who invested prior to the market crash in 2020 would have far more reassurance from their fixed term investment with ten years to run, than those with just five.
Whilst ultimately, we hope that no situation arises whereby short term autocalls are caught by adverse conditions to loss-making effect, we will continue to advocate the obvious benefit in the extended maximum term.
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