Going beyond the FTSE 100: Innovation in structured products

Anyone familiar with the UK retail structured product market will know that there is a huge range of products available for investors. Yes, many of these are FTSE-linked and yes, the payouts are relatively simple.

However, the majority offer genuinely attractive opportunities for individuals looking to access UK equity markets, especially those looking to preserve capital should markets fall. But what about investors who are looking for something a little different? Perhaps they want access to new markets, or payouts that match a more specific market view. How do product providers cater for these investors’ needs and what is the source of their inspiration?

Most providers will be communicating with advisers to get feedback from them and their clients. Surveys, conferences, even regular chats on the phone or face-to-face: these are all useful ways for providers to get pointers on what investors want. Furthermore, some providers have internal sources they can tap into for inspiration, like research departments, trading and structuring teams.

A handful of the larger providers have an additional ace up their sleeve: a large and varied client base. These providers don’t only structure products for the retail market, but also for discretionary and institutional accounts. By seeing the entire market, these providers are able to offer greater innovation to end investors: by transferring ideas from the institutional side of their business over to the retail side.

There will always be critics who suggest retail investors don’t get the same exposure to a providers expertise and innovation as their institutional business. Whilst it is true that not all institutional payouts are shown to retail, this is often for genuinely good reasons: the structure might be overly complicated meaning it is not suitable for unqualified investors, or the investment rationale may depend on specific research that is not suitable for individuals.

However, it’s often the case that, with a little tweaking, an element of the institutional idea can be translated into a product suitable for retail distribution. These elements can take the form of the underlying, the payout or even the wrapper used. For example, many discretionary accounts were recently cautious about timing their re-entry into markets and wanted to incorporate 'lookback' features into their products. Given that good market timing is relevant for all investors, we remodelled a successful 'Best Entry' payout for retail, offering an optimised entry point taken during the first quarter of the product's term.

For the risk averse, a Gilt-backed, collateralised wrapper has proven to meet a very real demand. This was originally a solution for institutional investors looking to mitigate credit risk. However, this wrapper clearly had broad appeal in the retail market, and is especially suitable for individuals with similar concerns about credit risk.

Innovation in this market is constantly improving, and investors are getting more exposure to interesting, less standard ideas. Investors looking to raise the stakes, and branch out of the ordinary, have more opportunity than ever to take advantage of the wealth of resources behind their product providers.

Marc Chamberlain is an executive director at Morgan Stanley, who has worked in a number of areas including European exchange traded funds, fund-linked derivatives and equity structuring.

The views expressed here are personal and not necessarily those of Morgan Stanley. No offer to buy or sell is implied.