David Stevenson: A closer look at structured products

Monday 28 September, 2009

This weekend’s column discussed various listed structured products available on the secondary markets from wealth orientated providers. Inevitably there’s a whole bunch of details I have to skate over in the column plus the inevitable small torrent of emails asking more details and enquiring how to trade.

Before I try and expand on the funds mentioned in the column, first an apology. The Morgan Stanley product I mentioned doesn’t actually have a 50 per cent barrier but a 30 per cent one – my mistake.

I still think it’s a very interesting idea for cautious investors so here’s the product in much greater detail taken from from the product features document

“The FTSE 100 Best Entry Enhanced Tracker Note offers an opportunity for investors who are looking for an entry point into the UK market. The product is designed for investment and portfolio managers with a mid to long term view, who are looking to re-enter the UK market but are worried about a potential fall in the near term. Similar to a regular Enhanced Tracker, the Best Entry note offers leveraged exposure to any positive performance of the index over the 6 year term. However investors also benefit from gaining upside exposure to the FTSE 100 from the lowest daily closing value over the first 6 months. The principal is repaid in full as long as, at maturity only, the index has not fallen by 30 per cent or more from its initial level.

Best entry level - The FTSE 100 is observed on a daily basis for the first six months. The Best Entry Level is the lowest closing value of the index during this period, except that, if the lowest closing value is lower than 70 per cent of the Initial Index Level, then the Best Entry Level is fixed at 70 per cent.

* Leveraged upside exposure to the FTSE 100 index

* High initial delta

* Optimised entry point: “Best Entry Level” is the lowest

* daily closing value of the FTSE 100 within the first six

* months, floored at 70% of Strike

* Euroclear settled

* ISA/SIPP/SSAS eligible

* Secondary market provided by Morgan Stanley1

* KEY TERMS

* Type Morgan Stanley Note

* Underlyings FTSE 100 Index (Bberg: UKX)

* Currency GBP

* Maturity 6 years

* Nominal Size GBP 100 (“Par”)

* Initial Index Level 4731.56

* Issue/Settlement 18 August 2009

* Best Entry Level

* Lowest closing level in first 6

* mths, min. 70% of Initial Index

* Level

* Final Index Level

* Average of the Closing index

* level over final 6 months up to

* and including 7 August 2015 (7 observations)

* Final Settlement 18 August 2015

* Sedol B46L758

* ISIN XS0445841074

* The note was struck on the 7th of August and is trading in secondary market at 107 - the index was at 4731.56 when struck and the best entry is at 4671.34 which was achieved 2 days later.

* Since issue the FTSE 100 is up 8.1% since launch - 1.3% is intrinsic from the low entry point to index level on strike date and 6.8% is from strike date to current level

As for the BarCap product it is due to list later this month and here’s the detail:

The Barclays Capital 5 Year FTSE 8% Zero Lock-in Note offers investors a potential annual return of 8 per cent as long as the FTSE is above 50 per cent of strike on the annual observable dates. If on any year, the FTSE is below 50 per cent, no capital growth is received that year. Capital is 100 per cent protected, subject to 50 per cent downside barrier observed at maturity only (European). However, if on any observable date the FTSE is above the Lock-in Level of 125 per cent, then the structure is 100 per cent capital protected and matures at 140%, regardless of the future level of the FTSE.

* 8 per cent Annual Capital Growth as long as FTSE above 50 per cent of strike Initial Valuation Date is 02/10/2009

* Memory Feature – Missed Capital Growth redeemed in any year where FTSE above Lock-in Level

* Note Issue Date is 16/10/2009

* Lock in Level – 125% of initial strike Final Valuation Date is 02/10/2014

* GBP Maturity Date is 16/10/2014

* 100 % Capital Protection subject to 50% Downside Barrier ISIN:

* Full capital protection regardless of Lower Barrier if Lock in Level Reached.

Last but no means least I didn’t have enough space in the column to mention a more mass market product from the team at RBS. They’re launching an Accelerated Tracker that buys into the Russian market (!) over the next 4 years. It gives a load of upside participation in this hugely volatile emerging market but with a cap on total returns over those four years. Frankly this cap could be hit within a single good year (the RDX is already up over 80 per cent this year alone) and RBS have had to put that cap in place to capture the accelerated upside – very volatile markets are tricky for options writers which means that to give away such a chunky upside they have to take away some potential for gains with a cap. Most other listed structured product providers have been avoiding the emerging markets space so hopefully the RBS new product might spark some interest and new ideas.

* Russian Accelerated Tracker

* RDXEUR

* Strike Date: Friday 25.09.2009

* Listing: Tuesday 29.09.2009

* Quanto GBP

* Term = 4 Yrs

* Upside Participation = 200%

* American Barrier = 65% (observed continuously)

* Index cap is 170%, so max return is 240%

David Stevenson is also one of the Four Wise Monkeys at the online TV investment programme www.4wm.co.uk

adventurous@ft.com