Max Darer, Lowes Financial Management, 21/06/2023

This month has witnessed the first UK retail autocall product to mature with a loss in more than two years. In the past five years only 12 autocalls have matured with a loss out of almost 1500 maturities in total. The 12 loss making plans had baskets of shares as their underlying measure, as indeed does this month’s loss-maker.  On the other side of the league table it may come as no surprise that the highest returning autocalls are also share linked demonstrating both sides of the risk reward coin.

This month’s negative performer was a share linked, step down autocall linked to Barclays, GlaxoSmithKline and Vodafone. With six monthly kick out observations starting at 100% of the stocks initial levels recorded in June 2017, with the observation level decreasing by 2.5% each further six months the plan runs down to a final kick out trigger level of 75% of the initial index levels.

The reward for a successful maturity was a return of 18.5%, for each year held and at this level it is clear that this was a high risk, speculative investment. 

As it was, the acceptance of the risk on this occasion transpired in a very poor outcome with the investment suffering the impact of the substantial decline in Vodafone share price.  Not only did this mean that it was below the relevant maturity trigger level on every occasion, it was also significantly below the 50% capital protection barrier at maturity.  The result was a loss of 66.9% mirroring the fall in Vodafone shares over the six-year investment term.

Whilst we know that historical performance is not an indicator to future results there may be some salt in the wounds when we look at historical backtesting of the plan.  This demonstrates that despite the dire, recent performance of Vodafone, historically 85% of the time this strategy would have at least returned invested capital.

Historical backtesting since June 1995 

 

Total possible start dates:                                   7044

Of which, yet to reach 1st anniversary            251

Total possible maturity dates                             6793

 

Maturity outcomes (% of total possible)

Matured realising a gain                                    5190  76.4%

Matured returning capital only                        597    8.8%

Matured with a loss                                             487    7.2%

Yet to mature                                                         519    7.6%

 

Whether the situation is partly blamed on one or more of a myriad of possible justifications, be it stagnating revenue and profits, Brexit, Covid-19, war in Europe, or something else altogether, the fact is that Vodafone shares have fallen to a 27 year low, with the result that this trade represents one of 7% of historical time periods where a loss resulted from this strategy.

Share linked plans are typically high risk and as such, often represent the best and the worst of all structured product maturities.

 

 

Structured investments put capital at risk.

 

Past performance is not a guide to future performance.