Structured products are “an accident waiting to happen” for many retirees, with the inflexible terms and conditions of the product likely to have left investors exposed to losses following this year’s sell-off, according to 7IM.
Many structured products have terms that allow them to absorb some level of losses before the end investor starts to lose money.
The scale of the falls seen in 2020 – when markets shed as much as a third of their value – means there is a real chance that many products will now be “underwater”, according to Matthew Yeates, senior investment manager at 7IM.
“Structured products specifically would have been among the most volatile products to own through the period, and given the scale of the falls in markets we have seen, the drawdown across parts of the structured products market has been brutal,” he explained.
Yeates said this was a major problem now for retirees who had turned to structured products to provide them with an income. He was concerned that the size of the drawdown experienced by such products was unlikely to encourage investors to hold for the long term, especially when many are using structured products in retirement portfolios to cover short-term income needs.
However, Nick Johal, head of fixed income at investment company Catley Lakeman Securities, said when used as part of a diversified portfolio, structured products have a long and demonstrable track record of delivering positive investor outcomes – even during periods of market stress.
“The defined return for a defined risk feature common to many structured products offer a compelling predictability of returns. As with any high yielding asset in an ultra-low interest-rate environment, there are risks and there are a range of different structures to meet most risk profiles,” Johal said.
“However, offering a half-way house between safe but low yielding bonds and higher growth but potentially volatile equities, they can improve the risk-adjusted returns of an investor’s portfolio.”
7IM’s Yeates, on the other hand, said: “The key difference for investing in retirement is that investors only get one chance to get it right. Using structured products or relying on natural income doesn’t cut it.
“Investment solutions for retirement should be built on solid foundations, and not expose investors to the worst of market falls when there is a correction. Unfortunately, defined income structured products usually do exactly that, which is just plain dangerous.”
The investment manager said landing in such a situation could be “an accident waiting to happen” for retirees when they come to review their investments post-crisis, and find capital they thought they had is now much lower.
Yeates added a total return mindset in retirement, albeit it one that makes provisions for short-term income needs, provides a better long-term solution that doesn’t need to be changed or “rescued” when markets tumble.