France Performance Report - August 2020 update

Data & editorial: Nikolay Nikolov and Amélie Labbé

If you are interested in having a similar bespoke report produced for your organisation, please contact Jose Erasun at Jose@structuredretailproducts.com

Summary

Structured products are a fully-fledged asset class in the French savings market and one which keeps proving its ability to deliver long-term returns in different market configurations.

As part of its commitment around transparency in the structured products market, SRP carried out an in-house local market research report. The analysis unveiled that only 3.8% of the products that matured between September 2019 and August 2020 returned losses, and the average return was 5.47% pa for capital-at-risk products and 3.26% pa for capital-protected products. The average over the entire sample was 5.36% pa. These figures are impressive, especially compared to the negative long-term French interest rates.

Autocalling products made up 86% of all maturing products in the period and these ran for an average term of 1.5 years producing an average annualised return of 5.87%. Some 79% of all autocallables recorded average annualised returns above five percent.

There have been two extremely different periods before and after the Covid-19 crisis. In 2019, the drastic drop in risk-free rates in the European markets and the growth for the markets globally highlighted the appeal of structured products for investors seeking a positive return while staying protected in their exposure to the risky bond market and the unpredictable stock market.

The Covid pandemic market crash slashed returns across all asset classes, including structured products. In April and May this year, structured product returns plummeted in parallel with the stock market. They were also negatively impacted by some risky structures that breached protection at maturity as well as some credit-linked notes linked to retail company Rallye. We should bear in mind that this kind of product is not the most popular structure marketed in France. Additionally, around four percent of products had a negative return, a fairly low percentage compared to all the products. That being said, the losses undergone by certain products were quite significant, weighing on the average return.

Since June, we have seen structured products returns picking up again, and this amid a rather calm summer for the markets. Specifically, the performance has been supported by autocalling products with negative or step-down autocall triggers, as well as by participation structures launched eight years back that matured with a gain. In August, structured product returns picked up to reach pre-March levels, specifically returns between five and seven percent.

The ability to set protection barriers to reduce risk is one of the most important features of structured products. This advantage has gone some way in providing some certainty in the current very uncertain environment.

Additionally, only around five percent of the products linked to the four most-used synthetic dividend indices saw their capital protection remain highly sensitive to those indices’ levels (as of the end of March 2020). This is a remarkable achievement for all French structured product providers in issuing products with solid protection capable to withstand this year’s turbulent market environment.

Structured products have delivered a stable and enhanced regular return compared to bond and fixed income strategies. At the same time, structured product payoffs have allowed a controlled and lowrisk exposure to the riskiest assets (equity in particular). This is why we can conclude that structured products are a credible alternative, allowing to combine capital protection and optimised returns.

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This report provides an analysis of the performance of structured retail products distributed in France. The first part focuses on the products that matured or expired between September 2019 and August 2020. For the analysis, we reviewed 2,525 products due to mature or potentially expire early.

In a second part of this study, we analysed how structured products have performed relative to typical passive equity index-based and bond ETF strategies over the last five years.

The third part of the report looks ahead to review the outstanding structured products in France and see how they are placed to face the current challenging markets.

The analysed data is taken from the StructuredRetailProducts.com France database, which covers over 10,000 products, of which 4,500 are live year-to-date.

Data collection and criteria

The performance data has been calculated in-house and is based on the performance of the underlying over the investment period. Additional performance data has been extracted from public sources such as provider websites and submissions from market players.

The calculation of the performance of matured products takes into account the capital return and all interest, fixed or variable, paid during the lifetime of the investment and at maturity.

The value of the coupons itself is derived from the product description of coupon size and frequency.

Methodology Limitations

The returns shown do not take into account management fees in the case of a life insurance or investment contract, or custodial fees in the case of an investment in a securities account. In addition, returns exclude entry/arbitration fees in the case of a life insurance or investment contract, as well as the subscription fee in the case of an investment in a securities account and social and tax levies.

The study analyses only the products for which SRP has collected or calculated the performance (90% of the matured products in the database).

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Part 1: Performance Analysis

1.1 Analysis of matured products (September 2019 to August 2020)

Key points

Some 95% of all products maturing (or autocalling) between September 2019 and August 2020 generated positive returns for investors, with one percent returning capital only and 3.8% returning a loss.

The 892 matured products collectively delivered an average annualised return of 5.36% over an average term of 2.2 years.

Capital-at-risk products produced an average annualised return of 5.47%.

Autocalling products made up 88% of all maturing products during the period and ran for an average term of 1.5 years, producing an average annualised return of 5.87%.

Annualised return - autocalled/matured products (September 2019 - August 2020)

80% linked to a single stock, worst-of or CLN

The analysis encompasses 892 products that matured or autocalled between 1 September 2019 and 31 August 2020, of which 188 reached their maturity date while 757 expired earlier.

The period was very successful for French investors in structured products as the vast majority of products provided returns above five percent. This is an interesting return given the extremely low or even negative interest rates for risk-free investments.

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Just under four percent of the products in the sample matured with a loss. For those negatively performing products, returns were between -0.59% and -48.96% pa, resulting in an average loss of -18% pa.

The losses were felt most severely in April and May when single stock-linked products or worst-off structures ended up breaching protection barriers and finally lost capital. A number of CLNs with embedded credit default swaps on French retail company Rallye also weighed on the performance.

The average over the entire sample was 5.36% pa delivered over an average term of 2.2 years.

The 45 capital-protected products in the sample delivered an average annualised return of 3.26%. With this type of products, investors recover 100% of their initial investment at maturity in addition to a potential return (except in case of bankruptcy, default of payment or resolution of the issuer).

Only two capital-protected products returned just the initial investment, while over half of them have increased it with an annualised return above 2.5%.

The 42 fund-wrapped products returned on average an annualised 3.2% for an averaged investment term of six years.

While it may have started in an optimistic frame of mind, 2020 experienced the stock market crash resulting from the global spread of Covid-19. In April and May this year, structured product returns plummeted along with other asset classes. These were negatively affected by some risky structures that breached protection at maturity as well as by some CLNs linked to Rallye coming to maturity.

On the one hand, counter-performing products accounted for 3.8% of the total, a fairly low percentage compared to all the products. On the other, the losses undergone by certain products were quite significant,

weighing on the average return. Notably, losses in the period stemmed mostly from single stock-linked and worst-of structures, which are not the most popular structure marketed in France.

Since the lows of April and May, structured product returns picked up in August to reach pre-March levels, specifically return of between five and seven percent.

Another notable fact is that only six of the index-linked products in the SRP database breached their protection barrier.

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Equity (Single Index)

Equity (Single Share)

Equity

Most used underlyings: Market share by volumes and average annualised return (%)

CAC

SBF

Cac 40, Eurostoxx 50

Euronext France Germany Leaders 50 EW Decrement 5% Index

Solactive France 40 Equal Weight NTR 5% AR Index

Bouygues

Share Basket (Unspecified)

The Eurostoxx 50 in isolation was the most prevalent underlying, accounting for 38% of all maturities. Some 336 of these were linked solely to the Eurostoxx 50, producing an average annualised return of 5.27% over an average term of 2.6 years.

Early maturing products linked to synthetic dividend indices have increased the average return to 6.99%, an excellent return in a market where interest rates are considerably low.

Payoffs

Autocallable products with conditional protection have been and continue to be the dominant payoff in France. The early redemption feature has significantly improved the average capital return.

1.2. Autocallables

Key points

Some 757 products with knock-out dates between September 2019 and August 2020 expired earlier.

Early redeemed autocallables returned an average annualised coupon of 6.7% compared to 5.9% for all autocallables (early expiries & final maturities).

Some 80% of all autocallables recorded average annualised returns at or above five percent.

The autocall structure made up 86% of all maturing products in the period. They ran for an average term of 1.55 years producing an average annualised return of 5.9%.

Some 55% of the autocalls (of which 14% with a negative autocall trigger) materialised on the first observation date, generally after one year of investment. Twenty-two percent occurred on the second observation. Only 51 products in the sample have reached their projected maturity.

of annualised performances - autocallables only (autocalled September 2019 to August 2020)

The largely positive markets in 2019 allowed the early redemption of many products issued in recent years. However, the stock market fall in March 2020 meant that the maturity of many autocalls was deferred until a later date when they would potentially mature with a larger gain.

Histogram

The choice of underlying asset is naturally correlated to the offered yield, but also to the rate of the autocall taking place. The table below analyses how the asset impacted the coupon, the frequency of autocalls realised and the actual investment period. We observe that structures linked to decrement indices have increased the average return rate from 5.65% to 6.99% while their autocall success rate during the period was down eight percent compared to benchmark-linked structures.

On the other hand, the actual average investment term was twice as long for products linked to a stock market index. This is because some 20% of the products in this sub-set ran through their organic maturity, ie six to eight years.

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Part 2: Structured products in perspective

Comparison to other investment alternatives

In order to further analyse structured product performances, we deemed it appropriate to consider how other popular investment alternatives have performed over the same period.

To benchmark the performance of structured products against industry standards, we looked at two popular passive index-based strategies, which represent direct equity holdings. To round the picture off, we also compared the performance of structured products against two bond ETFs, which replicate the performance of bond indices.

The analysis below shows that structured products have delivered an enhanced regular return compared to bond and fixed income strategies, while in the same time a structured product payoff allows a controlled and low risk exposure to the most risky assets (equity in particular).

2.1. Structured products v direct equity holdings

Key points

Unlike a passive index-based strategy, structured products have delivered stable returns while moderating the exposure to excessive fluctuations in volatile markets.

 Solid protection barriers and diversified index-linked exposure helped preserve capital at the height of the Covid-19 related market crash.

 Since the lows in April and May 2020, structured product returns picked up in August to reach preMarch levels, reaching between five and seven percent.

We compared 2,525 capital-at-risk products [that have matured or expired early since 2015] to two exchange-traded funds (ETFs), based on the Cac 40 and the Eurostoxx 50, with reinvested dividends.

We calculate the performance of each of the two other investments over the same period, allowing us to calculate annualised returns for the structured product and the two comparison investments. This means that each of the structured products in this sample has been benchmarked point-to-point to the two ETFs over their full investment term starting from the initial date to their maturity. The results are presented on a monthly average basis.

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*Source: SRP, Investing.com

Despite the interruption this year, the stability and visibility of structured products’ performance remain obvious throughout the period. Our first conclusion is that over the past five years, structured products have effectively made it possible to manage the exposure to the most risky assets (equity).

In March, structured product returns plummeted in parallel with the stock market. However, the losses were felt most severely in April and May when some products linked to single stocks or worstof structures linked to a stock basket ended up breaching protection barriers and finally lost capital. Even if only four percent of the products in the sample lost capital, the losses experienced occasionally extended to -49% annualised.

A number of CLNs with an embedded credit default swap on French retail company Rallye also weighed on the performance, as the recovery rate on the retailer was set at 12.5%. This meant that only 12.5% of the initial investment was to be repaid at maturity.

Interestingly, products in the SRP France database that are linked to an equity index have not breached the protection barrier (generally absorbing a -40% to -50% fall). Therefore, these products have not lost capital, globally. This brings us to our second conclusion, notably that investing in equity markets via structured products has allowed investors to avoid some of the market falls thanks to the capital protective barriers that almost all structured products offer today.

Since the lows of April and May, structured product returns picked up again to reach pre-March levels in August, with returns between five and seven percent.

2.2. Structured products v bond strategies

To measure the performance of structured products against fixed income alternatives, we selected one high yield and one investment grade corporate bond ETF. As with the previous comparison, we calculate the return based on the price of each of the two bond funds over the same time period that each structured product runs.

Prior to the creation of the ETFs, we used as a proxy the historical data of their respective benchmark indices – the Bloomberg Barclays Euro Corporate Bond Index and the Markit iBoxx Liquid High Yield Total Return Index.

* Source: SRP, Investing.com

** Includes capital-at-risk and capital protected structured products (strike date > Jan-2010; maturity date Jan-2015 to Aug2020)

*** Bloomberg Barclays Euro Corporate Bond Index and Markit iBoxx Liquid High Yield Total Return Index historical data is used as a proxy prior to the creation of the funds

As we can see from the chart, during the last five years, structured products have delivered more stable and broadly higher returns compared to an investment in a fixed income ETF with the same duration. In fact, since 2015, an investment in the bond ETFs would have outperformed structured products only in 2016, as well as between April and June this year, when as we saw a number of rather risky structures weigh on the average return.

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In the first case, oil-exposed high yield utility ETFs tended to outperform in 2016 after the slowing Chinese economy and falling crude oil prices in the second half of 2015.

In March 2020, the Covid-19 pandemic market crash slashed returns across all asset classes. We then saw corporate bond valuations soar from their lows due to purchases by the central bank especially in the high yield space. As a result of the massive monetary stimulus, yields plummeted, pushing bond prices up.

Since June, we see structured product returns pick up again, in the midst of a rather calm summer for the markets. Performance here has been specifically supported by autocalling products with negative or stepdown autocall triggers, as well as by participation structures launched eight years back that matured with a gain. In August, we saw yields approaching average levels for the period.

Part 3: Looking ahead

Maturities going forward and barrier risks

This part of the study looks ahead to review the existing structured products in France to see if there was a real risk for the capital barriers at the height of the market disruption. The SRP France database lists 6,444 capital-at-risk products issued in France with a final maturity date after 1 April 2020. Of those, 2,246 autocalls have already successfully called early providing investors with full return of capital and a positive annualised average return of 6.87%. This leaves 4,198 outstanding products, of which 3,759 are autocallables.

The vast majority of the above products are linked to a single equity index and this study will focus on that universe. From the 2,341 autocallables linked to a single index, 28% are linked to the Eurostoxx 50 and 53% are dependent on synthetic indices.

Most structured products offer soft protection, meaning that while their mark-to-market value is highly correlated with the performance of the reference asset, the invested capital is protected at maturity so long as the underlying does not depreciate to more than a predefined barrier level. In general, capital-at-risk structured products in France are protected by a single European barrier, which is reviewed at maturity. This means that if the underlying is above this level at maturity then the investor’s capital will be repaid in full, potentially with a coupon if markets have recovered.

From the 656 live products linked to the Eurostoxx 50, only two products have not returned to the safety zone as of the end of March. The chart shows that all future protection barrier levels, as indicated by the grey dots, were safely below the level of the benchmark at the end of March, as shown by the horizontal pink line. The darker curve shows the evolution of the index in the last five years and highlights the recent falls.

Euro

Structured

*Source: SRP, Investing.com

Only strikes prior to 01 April 2020

This means that even if the benchmark had not recovered from its low level for a long period and had stayed around its level as of the end of March, none of the live Eurostoxx 50-linked products would have lost capital for their investors.

The next thing to observe from the chart is that 95% of the future active maturities are situated after January 2023. Additionally, we note that 58 products have a negative or step-down autocall barrier, which increases their chance of expiring long before the maturity date. If not early redeemed, 113 products linked to the benchmark consider their next call point in less than a year (including 41 products with daily observation).

As already mentioned in this report, synthetic indices have delivered enhanced returns to investors over the last five years. From the 1,836 products linked to a synthetic index, 655 had already successfully called early delivering an average annualised coupon of over 7.2% for a 1.3-year average holding period. The SRP database lists 1,181 live structures linked to 57 indices with decrement.

Most of these indices keep a very strong correlation with the benchmarks and withhold a fixed rate dividend. Given the current lack of visibility on the dividend that a company will be able to distribute in the future years, the pre-defined fixed dividend allows an significant improvement of the payoff. The equal weighting [of the constituent shares of these indices] is supposed to gradually compensate the difference between the real dividends reinvested in the index and the withheld decrement (but this may not be the case in some years).

Four synthetic indices account for 37% of the products in this category. These indices also represent 27% of the outstanding capital-at-risk products linked to an equity index (with a final maturity date beyond 1 April 2020).

The chart below looks at the future protection barriers of the products linked to the four most-used synthetic indices in France. The idea is to illustrate how far barriers stood from being breached by these indices’ levels measured on 31 March 2020.

Index

Future barriers (Index_3)

*Source: SRP, Boursorama.com

Only include strikes prior to 01 April 2020

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Maturity barrier as a risk measure (Top 4 synthetic dividend indices)

The red line in the chart represents the level of each of the four most used synthetic indices at the height of the crisis (as of 31 March 2020). The dots correspond to the future protection barriers (PDI) expressed as a percentage from this level: the further below the red line the dots are, the better protected the products have been.

As we observe from the chart, virtually all future protection barrier levels, as indicated by the dots, were below the level of each of the analysed indices as shown by the horizontal red line. We also note that 84% of the barriers could have absorbed an additional fall of at least 10%, similar to what happened at the height of the market crisis. This means that even if the indices did not recover from their respective levels for a long period and stayed around their lows, virtually no product would have experienced a capital loss.

Only around five percent of the products have had their capital protection remain highly sensitive to indices’ low levels in March. However, the first one of these maturities is occurring in 2027, seven years from now.

The next thing to observe from the chart is that 84% of the maturities are concentrated from 2027 through 2029, giving time enough for the early redemption of the products to take place or to allow the capital protection to actuate at maturity and thus minimize the risk of loss.

Additionally, we note that 50 products have a negative or step-down autocall barrier, which is increasing their chances to expire before the maturity date. If not early redeemed on any of the dates, more than half of the products linked to an optimised index will consider their next call point in less than a year. One out of five products considers a quarterly autocall observation and 1 out of 7 products checks for the autocall twice a year. Nine percent of the products are reviewed on a daily basis from the first year of investment onwards.

As far as the barrier level is concerned, Athena autocallables expose investors to slightly more risk than their Phoenix counterparts (21% of the barriers in Athena products were set higher than 60% of the initial level compared to 17% in the case of the regular income products).