Structured Products Annual Performance Review 2022

2021: A maturity mop up

All 227 capital-at-risk autocall maturities linked solely to the performance of the FTSE 100 Index realised a capital gain for investors, returning an average annualised return of 7.23% over an average term of 2.47 years. Conversely, the loss-making maturity and the eight that returned capital-only were linked to the performance of multiple indices or individual shares. The 168 non-FTSE only capital-at-risk autocall maturities returned an average annualised return of 6.85% over an average term of 3.49 years.

A function of the market crash in Q1 2020 meant that a significant number of autocall products saw their respective potential maturities deferred until 2021 or later. Generally coinciding with the easing of lockdown restrictions, 2021’s market recovery saw 400 autocall products mature – 312% more than in the preceding year. Resultantly we’re able to provide a significantly more positive reflection for the sector in this year’s Annual Performance Review, more consistent with those enjoyed pre-covid-19. 395 capital-at-risk autocall contracts matured in 2021, returning an average annualised return of 7.07% across an average term of 2.9 years. 97% of such maturities delivered a capital gain for investors, with just 1 realising a capital loss – the remaining 8 simply returned investors’ original capital in full.

An unwelcome re-emergence…

Annualised returns of Autocall maturities in 2021

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.

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 Reviewof 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 2014 no capital-

FTSE 100 Only Capital-at-Risk FTSE 100 Only Deposits

Non FTSE 100 Only Capital-at-Risk Non FTSE 100 Only Deposits

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15 10 5 0 -5

Maximum length of capital-at-risk autocall structured products issued since 2012

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

-10 -15 Annualised Returns (%)

of polarisation in the data for non-FTSE only plans; higher returns can be achievable, albeit negative returns are at an increased likelihood. The loss-making autocall contract was linked to the performance of three FTSE 100 companies, and lost capital due to the adverse performance of Standard Chartered Plc which was down 52.92% over the investment term. At the opposite end of the risk return trade-off, the deposit-based maturities ensure capital protection at the cost of lower returns on offer. The plot illustrates that of course while no deposit maturities lost capital, a greater number of them returned original capital with no further interest payment. It is noteworthy that all seven of the FTSE 100 only linked deposit plans that matured with no further interest payment were issued in 2018 with maximum terms of just three years, and should they have had longer to run may have matured positively…

The plot above offers an insight into the distribution of annualised returns of all autocall products maturing in 2021, split into FTSE 100 only and non- FTSE 100 only linked plans, with deposit maturities included for reference. Whilst not completely symmetrical, the plot indicates a greater degree of consistency in the maturity performance of FTSE only linked capital-at- risk autocalls, than the non-FTSE only alternatives. This pattern has been present throughout the recent history of the sector and is a function of the underlying(s) utilised in non-FTSE only plans – 147 of these maturities were linked to the performance of multiple indices or individual shares which are more volatile by nature. Share-linked and multi-index plans are inherently riskier than plans linked to a single index, such as the FTSE 100, and as such, potentially reward investors for the excess risk with larger coupons offered. Therefore, this explains the greater degree

2012

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2015

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2019

2020

2021

Under 6 Years

6 Years

Over 6 Years

2020. The first 5-year maximum term capital-at- risk autocall issued since 2015 was in late 2020, and throughout 2021 a further 58 autocalls with a maximum term of 5 years were issued.

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

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