U.K. investors are being pitched structured products as an alternative to a once-popular type of investment trust, which has been plagued by bad publicity in recent years. Jupiter Asset Management, a U.K. fund manager, is blazing the trail for structured products after launching an innovative instrument last week that will give investors a viable alternative to shares issued by split-capital investment trusts. Market officials say this move signals the growing readiness of investors to purchase structured products.
Split-capital investment trusts looking to leverage their portfolio issued defined growth shares with no dividend, referred to as zero-dividend preference shares. When the stock market bubble burst in 2000/2001 these trusts lost money and the product picked up a bad reputation.
The Financial Services Authority carried out an enquiry into split trusts and concluded that the problems were confined to a minority of trusts, but the investigation added to its tarnished reputation.
Fundamental Data, a U.K. funds and trusts data provider, calculates GBP436.9 million (USD784 million) of zero-dividend preference shares are expected to mature in the next 18 months. Several asset managers are studying alternative investment vehicles to reproduce the attributes of zeros. Aberdeen Asset Management is interested in offering a structured product replacement for this type of fund. Richard Plaskett, fund manager at Aberdeen in London, said the group would want to offer a product that was competitive and had an attractive payoff for investors. "I think everyone in the industry should look at this," said Plaskett. He noted, however, current low equity volatility makes it difficult to structure attractive payoffs and this could stump innovation.
In the Jupiter product, the asset manager invests in six corporate bonds with a minimum rating of AA minus. It then enters a swap with UBS, in which it pays the floating coupon on the bonds and receives a defined return, based on the level of the FTSE100 at maturity. Richard Pavry, a director at Jupiter, said the asset manager was not looking to design the perfect structured product, but to cater for the excess demand for zeros.
Mick Gilligan, associate director of funds research at broker Killik & Co in London, said all the indications are that U.K. fund investors are warming to structured products. Killik is in the process of splitting its fund research between traditional mutual funds and alternatives or structured products, in response to the rising numbers of structured funds.
