Retirees who hold structured products could be worse off due to current market conditions, according to an analysis by investment management firm 7IM.
The company said that the sell-off induced by the pandemic and lockdown has tested this type of investment vehicles; and the fact that they are designed to “absorb some level of losses” before the end investor starts losing money could hit retirees hard.
Matthew Yeates, senior investment manager at 7IM, said that considering markets shed as much as a third of their value during the covid peak, many structured products will now be “underwater”.
“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 said.
This could become a major problem for those who turned to these investments to generate income after they stop working.
“The key difference for investing in retirement is that investors only get one chance to get it right,” Yeates added. “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.
“This could be an accident waiting to happen for lots of retirees when they come to review their investments post the crisis, and find that the capital they thought they had is now much lower.”
But Clive Moore, managing director at structured products provider Idad, told International Adviser that there is no basis to these claims.
“This is complete hogwash and backed up with no evidence at all. Structured products come in all shapes and sizes but should be designed to match investor objectives in the most efficient and accurate way they can.
“For example, an investor seeking income can access a much higher level of income than available from traditional sources, together with more capital security over the life of the investment term.
“If investors can’t hold an investment for the term it’s designed for, they shouldn’t be buying structured products. Unlike many other asset classes – property funds, Ucits funds invested in illiquid assets – structured products offer intra-day liquidity, provided by the largest financial institutions in the world.
“The prices during the investment term can be very volatile, but the products are designed to be held for their full term, so this should be of no concern to investors or advisers except in extreme circumstances, where liquidity is always available – unlike other asset classes.
“The performance of structured products speaks for itself and there are millions of satisfied investors who can testify to this. We and other organisations regularly publish performance statistics demonstrating quite how much outperformance structured products have delivered.
“There have been a few instances of structured products being used wrongly in the past, but I don’t think there’ll be many in the fund industry throwing stones in their glass house at the moment,” Moore added.
A different approach
But according to Yeates, retirees should focus on flexibility and diversification.
“Investors looking for a portfolio that maximises their chance of meeting their retirement spending needs should focus on the total return of portfolios, incorporating both capital returns and income.
“We believe in a long-term, total return approach to retirement income. To allow us to take a long-term approach, we split investments into different pots that provide for short-term income needs, longer-term needs and a buffer to provide income when periods of volatility arise.
“We have rules in place to follow for rebalancing portfolios when markets are up or down. This approach allows us the flexibility to look across all types of investments, not just those with high levels of ‘natural’ income.
“In turn, it gives retirees the flexibility to work out how to spend their total return in retirement, without worrying that they’re getting a little less this year from dividends.”