Why structured products must regain trust

While Jones-Prichard paints this as something of a back-to-basics trend, there is still a part of it that not all investors will understand: the income portfolio. It’s a tough ask to get your head around a basket of JP Morgan proprietary strategies. “Investors really had been saying we want something simple,” he says. “Some are saying they want it so simple it’s almost impossible to structure. But investors have been happy with ASX20+, it looks quite complex on the face of it but when you add up the bells and whistles they provide a significantly better outcome than they would have had without them.”

The liquidity argument, he says, depends very much on the product and the manager. He says JP Morgan has always provided weekly or monthly liquidity in its products and has always sold them “as a buy and hold investment, not a trading product.” Liquidity problems, he says, depend on what the underlying product is: those that have been underpinned by hedge funds, for example, or mortgages, have been vulnerable when “there’s a massive rush that has meant managers have said: we can’t handle this, we’re going to close it for a while.” For a fund underpinned by equities, “that shouldn’t ever really be an issue. The liquidity of those assets will always be very high.”

Leyland, though cynical about the class as a whole, confirms this point. “It depends on the type of product,” he says. “If it is simple and just done with underlying options, there shouldn’t be a liquidity problem on the option side. But once you get into unlisted assets or derivatives, you run into two problems. One is the liquidity, and the other is the counterparty risk.”

On structured products, there’s not a regular visible fee you pay off each year, but instead a fee (1.8% on ASX20+) is taken out internally (or in some cases the bank makes its money by insisting on lending the money to invest in the product in the first place, a common Macquarie approach).

While the credibility of some structured products has been rocked, they have grown much too big to disappear now; they just change with circumstances. “In a bull market you find lots of structured products with exposure to whatever the flavour of the month or year is,” says Leyland. “Wherever there’s a fashion you’ll find a structured product following shortly thereafter.”