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Advisers cautioned on re-emergence of structured products

Date: Tuesday, June 9, 2009
Author: Liam Egan, Money Management.com.au

The managing director of independently-owned asset consultant firm CPG Research and Advisory has lamented the recent launch of new structured products by investment banks.

"Sadly, in the past few weeks we have seen the launch of a handful of new equity structured products with some sort of capital guarantees attached," Simon Ibbetson said.

"It appears that after an extended manufacturing hiatus the proprietary desks are once again building and aggressively promoting structured products to advisers."

Ibbetson said his opinion of the products was influenced by the unfortunate experiences of CPG Advisory's council clients who had invested in collateralised debt obligations (CDO) products.

"We have about 80 council clients and about 20 of these had some exposure to CDOs, although in all cases we advised them against investing."

His concerns for the new products, which include products from some of the major investment banks, are the long lock-up periods and the emphasis on the capital guarantee.

Ibbetson questioned the need for the guarantee, as the markets have fallen by 45 per cent from their highs.

"They are going to charge a lot for the capital guarantee now because they can claim risk is higher, but of course the risk of falling from here is much lower."

"After all, the markets have already fallen around 45 per cent and even after the bounce of the past two months they are still down around 40 per cent from their highs."

Ibbetson also cautioned advisers that some of the guarantees being offered with these products are not hard guarantees but rather conditional guarantees.

He said he believed there were better alternatives available to investors than locking your money up for seven, 10 or 12 years.

"You can for example buy some equity assets cheaply now because they at distressed levels, and where the down side risk is minimal."