Nordics Performance Report 2009-2019Q1

SRP Market Performance Review

Nordics 2009-2019Q1

Foreword

This report is compiled by Structured Retail Products (SRP) using the extensive proprietary databases of StructuredRetailProducts.com. The report has not been commissioned by any one financial institution or body, and is completely independent in its sources, calculations and findings.

As the leading independent resource for the global structured products industry, SRP has a vested interest in the industry’s wellbeing. As such, SRP compiled this report to promote both education and knowledge sharing that would allow the industry to grow and to develop, and deliver better results for investors.

Who is SRP?

Structured Retail Products (SRP), part of the Euromoney group of companies, is the leading online resource for the global structured products industry. With around 3,000 registered users and more than 22 million product listings covering over half a billion data points (as of July 2019), the website is the primary information source for a wide range of businesses involved in the manufacture and distribution of structured investment products.

This report is useful for all stakeholders in the industry, including issuers of structured products, distributors, investment advisors, index providers and regulators.

It analyses the investment returns obtained by structured products sold in Denmark, Finland, Norway and Sweden, including products that have matured or expired in the 10 years to the first quarter of 2019.

The performance data has been extracted from public sources such as issuer websites and submissions. Additional performance data has been provided by the issuers and distributors themselves.

What is a structured product?

Structured products are investments which provide a return based on the performance of an asset. This asset can cover the equity, index, fund, interest rate, currency, commodity or property markets. The payoff and level of capital at risk can be pre-defined. Payoff profiles can be designed to take advantage of rising, falling or range bound markets, and delivered in a way that can be tailored to the needs of investors.

They are designed for investors who are prepared to invest for a fixed period, and who also want some degree of protection over their initial capital.

Scope of the data

This report analyses the performance of subscription-based structured retail products marketed in the four Nordic countries: Finland, Denmark, Norway and Sweden. Iceland, Greenland and the Faroe Islands are excluded from the scope of this report.

The analysed data includes a total of 10,920 tranche products collected in the StructuredRetailProducts. com Nordics database, which covers over 23,074 tranche products, of which 5,866 are live year-to-date. The data presented excludes flow, leverage products and warrants (products on subscription period ie hävstångscertifikat, sijoituswarrantti or markedswarrant).

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

The performances do not take into account the management or any other fees in any of the product types the client is paying to the distributor and/or the issuer of the products.

When calculating performances, SRP will consider any overprice added to the issue price so that the performances reflect the actual return deducted by such overprice. For instance, a capital-protected product sold with a 110% issue price will have a minimum return of 90.91%. SRP will calculate the performance of income products as the sum of the capital return at maturity plus any paid coupons.

Calculations

The returns shown are gross. The study analyses only products for which SRP has collected or calculated performance. Out of the 13,312 structured products that have matured or expired in the Nordics in the period from 2009 to the first quarter of 2019, SRP has collected or calculated performances for 10,920, or 82%.

From those, 3,681 are capital-at-risk products, representing 34% of all maturing products, 265 are partially capital protected (over 75%), representing two percent of all maturing products and 6,974 are capital-protected products (including products sold at an issue price until 110%), representing 64% of all maturing products.

The dataset reflects the performances of 185 different payoff structures, as well as 3,078 unique sets of underlying assets and 76 issuing manufacturers and 118 distributors.

Choice of benchmark

While SRP calculated product performance in absolute terms, we deemed it appropriate to compare it to benchmarks that represent industry standards and/or investment choices investors might had made had they not invested in a structured product.

A natural choice for any investment in which no risk is taken is a risk-free benchmark, so the investor can gauge their excess return above the risk-free interest rate. SRP has compared the annualised return of capital guaranteed products with up to one-year term with the Stibor interest rates. Returns of capital guaranteed products with longer terms have been compared to the interest swap rate of two to 10 years, depending on the maturity of the products.

SRP opted for the European benchmark index Eurostoxx 50 to compare capital-at-risk products, although a high proportion of the products covered by this report will be equity-linked. In the sample, the Eurostoxx 50 was the single benchmark index which gathered most of the sales volume.

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Management summary

The Nordics structured products space is at a unique moment in its history. Many articles published in the region have been written about these products outlining perceived negative aspects of these products, about potential miss-selling, high fees and capital losses. But while the media has singled out individual cases to demonstrate its point, an independent analysis has never been carried out.

SRP analysed the last 10 years of products and decided to answer the question: do structured products deliver on what they promise?

The conclusion is, overall, a positive one. The report’s primary finding is encouraging: structured products averaged a 3.38% annualised return between 2009 and 2019Q1, and, crucially, performance has been increasing since 2009 in spite of the lasting effects of the financial crisis and oil price volatility on the capital markets as a whole.

The report highlights two other main conclusions:

1) The return of autocallables averaged over eight percent pa in the past 10 years.

2) While nearly one-quarter of products had a negative performance, investors got a better performance than if they invested in the equity underlyings.

Despite the positive correlation between the performance of equities markets and structured products, we observed the latter are able to outperform the markets, specifically when markets are moving sideways or tend to get slightly bullish. The choice of underlying and the timing of the investment are further factors for over- or underperformance of structured products.

The present report distinguishes between capital-protected and capital-at-risk products, and just like in other regions, the former have been surpassed by the latter in the Nordics. Since 2012, capitalprotected maturities in the analysed sample have given way to their capital-at-risk counterparts, because of continuously decreasing (and sometimes even negative) interest rates which have made it difficult to allocate resources for buying options at inception.

It’s worth noting that products with lower capital protection have outperformed capital guaranteed structures because they have higher exposure to equity market risk. This is in line with the basic principle of investing: the higher the risk, the higher the return.

But, overall, both types of structured products delivered higher returns than if the investor had decided to keep their capital in deposits, an encouraging finding. The extra return of these products has steadily increased since 2014.

While the Nordics is similar to its European or even US counterparts in terms of preferred product types, the post-crisis period saw issuers in the region get creative with many different payoff structures including proprietary indices, ESG and baskets of shares.

Products with an early redemption feature (autocallables) have been performing well in the current environment of low interest rates and moderate volatility. Almost all of the top performers in the study fell in that category and had their early maturity features activated, usually after one year of investment particularly in periods of strong equity rebounds.

Drilling down into the data and focusing on two specific markets – Finland and Sweden – trends remain the same.

In Finland, SRP concluded that 84% of the products which matured between 2009 and 2019Q1 delivered a positive return at the end of the investment term, with nearly one-third returning five percent or more. In Sweden, figures are more subdued, with 75% of the products delivering a positive return.

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Performance analysis

Structured products averaged a 3.38% annualised return between 2009 and 2019Q1.

Twenty-two percent of the analysed products scored negatively.

Performance has been increasing since 2009, though there was a dip in 2016 (1.68%), and a peak of 5.78% in 2017.

The first quarter of 2019 shows an annualised return of 4.23% pa.

From the total products with performance, 78% of the products which matured between 2009 and 2019Q1 delivered a positive return at the end of the investment term (3.7 years on average), according to SRP data. Thirty-seven percent of the products returned five percent or more.

Twenty-nine percent of analysed products returned the initial capital, while five percent returned less. The negative performances returned between -0.01% and -100% pa, resulting in an average loss of -4.44% pa. The positive performances returned between zero percent and 152.22% pa, resulting in an average gain of 5.64% pa.

When it comes to the historical performance, we can observe two distinctly different dynamics in the performance of structured products, notably before and after 2012.

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More standardised structured formulas, supported by rising equity markets, delivered positive performances despite the continuously decreasing low interest rates. Maturities between 2012 and 2018 have displayed a steady increase in their returns, slightly interrupted in 2016 when markets were affected by the Chinese stock market crash and the collapse in oil prices.

We can also conclude that products with an early redemption knock out feature (ie autocallables) have significantly improved the average capital return across all payoffs that they have been used in combination with. This is because autocallables are able to capture the upside market movements most other payoffs cannot access.

Historical performance of structured products (2009 - 2019Q1)

Capital-protected products vs capital-at-risk products

We distinguish between two main structured products families, depending on whether the invested capital is guaranteed at maturity or not. With the first category, investors recover a minimum of 100% of their initial investment at maturity (except in case of bankruptcy, default of payment or resolution of the issuer). To this category, we have also included products sold at an issue price between 100% and 110%.

The second category, which has become the most common in the low interest rate environment, typically delivers higher returns, but the initial capital is at risk and the investor may lose all or part of the originally invested capital, depending on the development of the underlying. Generally, these products offer conditional protection against a decline in the underlying by typically 10% to 40% or even 50% at maturity, within which limit the capital is guaranteed. Beyond this threshold, however, the investor is exposed to the fall of the underlying. The protection itself is carried out through a knock in barrier, which is set at a level lower than the strike price. If the barrier is breached, the percentage of the initial capital returned at maturity will be determined by the performance of the underlying in relation to its opening level. This category includes also products that have partial capital protection for example 90% or 95% at maturity.

Capital-protected products have accounted for the vast majority of maturities before 2012. Since then, capitalprotected maturities in the sample have given way to capital-at-risk products. The reason is the continuously decreasing interest rates which have made it difficult to allocate resources for buying options at inception. In the past, higher interest rates required less to be set aside to ensure the full return of capital, and hence more was left to be spent on options. This generally allowed for more attractive investment returns.

Faced with difficult market conditions, providers sought to address the need for yield and capital protection

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by developing defensive capital-at-risk structures aiming to offer a return in slightly increasing to neutral or even bear markets. This has been achieved with the use of the autocallable mechanism whereby products with longer maturities have the possibility to redeem early. For the same reason, credit-linked products have become more popular since they offer partial capital protection, especially in the case where they are linked to credit indices with multiple companies in them. We will elaborate more on the autocallable and credit payoffs further in this report. Historical

performance: capital-protected vs capital-at-risk (2009 - 2019Q1)

Capital-protected products

Capital-protected products outperform when their return is null, as generally a direct investment on the underlying would mean a loss of capital.

Issuers’ increased level of funding in the post-crises period led to a higher spread and outperformance of other risk-free investments.

Prevailing low interest rates have gradually restricted the issuance of fully capital-protected structured products. Of the 9,343 products issued between 2013 and the first quarter of 2019 (excluding flow, leverage, warrants and cancelled products), 2,920 protected at least 100% of the nominal invested (including products with issue price until 110%) or a share of 31% from the issuance. The share of capital-guaranteed products (including products with issue price until 110%) has significantly decreased compared with the period between 2009 and 2012, when such products accounted for 65% of the offer (3,645 and 5,650 products, respectively). Seeking to offer yield in a low interest rates environment, providers have gradually shifted from fully capital-protected products to structures with conditional protection.

We analysed 6,974 matured capital-protected products in the Nordics with maturity dates between January 01 2009 and March 31 2019. These products initially gathered €46.93bn of sales and delivered an average annualised return of 1.99% when they matured.

Forty-one percent of the products in the analysed capital-protected sample have just returned the initial investment including products with overprice until 110%. In the same time, 38% have delivered a return at or above two percent.

When looking at the capital-protected products sold over par, 51% returned just their initial capital at maturity, meaning that with the over-price, there was a capital loss for the investor.

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Histogram of annualised performances: capital-protected products (2009 - 2019Q1)

Capital-protected products saw their lowest point in 2011 with a performance of 0.7% pa. After 2014, these products offered more than 2.8% pa with a peak in 2017 (3.7% pa) so the returns stabilised, positively influenced by issuers increased funding level after the financial crisis. The fact that the products sold at an issue price until 110% are considered as capital-protected and those offer also higher participation, might have affected this.

Capital-protected structures pulled through the post-global financial crisis period with decreasing average returns, when in 2009 and 2011 the return was 0.7% pa.

Histogram of annualised performances: capital-protected products sold at par (2009 - 2019Q1)

Histogram of annualised performances: capital-protected products sold over par (2009 - 2019Q1)

The tables below highlight a few characteristics of the sample, which broadly match the characteristics of the overall capital-protected market in the Nordics. In fact, as can be seen, the typical product within the capitalprotected sample would be a one- to six-year uncapped call structure linked to a basket of shares or indices.

The sample is weighted toward equities (at 61%), be it shares, baskets or indices, or combination of these. In the Nordics, different kind of baskets are the favourite, hence the reason there are 1,929 different sets of underlyings.

Table 1.1: Nordics: asset classes within the capital-protected sample

Four percent of the products in terms of the issuance (two percent of sales) are linked to the OMX Stockholm 30 index as a single index, whilst two percent of the issuance and four percent of the sales are linked to the Eurostoxx 50 index. Products linked to the OMX Stockholm 30 returned average of 2.6% and products linked to the Eurostoxx 50 returned average of 1.1% pa.

Table 1.2: Nordics: underlyings within the capital

Table 1.3: Nordics: payoffs within the capital-protected sample

The sample is dominated by simple uncapped call structures (41% of the market) offering either full but more often partial participation in the upside of the underlying asset. Normally, bigger participation goes hand-in-hand with a bigger issue price. One specificity of the analysed participation products in the sample is the fact that the majority were not designed to capture the final evolution of the underlying, but an arithmetic average of its performances measured at a specified frequency during or at the end of the investment term. The lack of significant (adjusted) performance of the underlyings further explains the underperformance of the uncapped call payoff during the post-crises years. Capped call as single payoff have delivered better than uncapped calls, which returned 2.7% pa.

In contrast, the autocallable feature (knock out) has tended to improve the average capital return across all payoffs that it has been used in combination with. This is because autocallables are able to capture the upside market movements most other payoffs could not. Autocallables will be further analysed in a dedicated chapter later in this report. Capital-protected autocalls have delivered an average return of 6.18%.

Portfolio insurance used in different kinds of payoff combinations has delivered an average performance of 2.83% pa. These medium- to long-term products dynamically allocate between a risk-free asset and a risky portfolio, seeking to combine upside potential with a capital guarantee.

In other parts of Europe, the post-crisis period was marked by a trend towards keeping the product simple as far as the payoff mechanism is concerned, and modifying the exposure by investing into optimised indices that reinvest dividends and subtract a flat rate percentage. This has not been the case in the Nordics where many different payoff structures have been used though the most complicated structures have not been seen during recent years. A trend specific to the Nordics’ market has been to use proprietary indices, ESG and also other kinds of innovative structures and underlyings, although as we saw baskets are most used. This is due to low interest rates which have made it difficult for issuers to find attractive products on the typical benchmark indices and regular equities.

Spread options (84 products) didn’t deliver well, with an average performance of -0.6% pa. These products were mostly seen in Finland and Sweden, and a majority was launched between 2006 and 2009. These are normally products where the capital is protected and the investor will get a participation in the difference in the index performances.

Table 1.4: Nordics: terms within the capital-protected sample

Only 72 products in our capital-protected sample, representing initial sales of €1.28bn, have matured earlier than planned (either called or knock out). This means only 1.1% of the sample of capital-protected products had a maturity date other than the one planned. The main reason for the lack of early termination is the fact that only 71 products (one percent) include an autocallable (knock out) feature. Only 19 of these failed to breach the early redemption barrier, and have gone through their stated maturity, returning an average annualised 2.79% (compared to 8.37% pa for those which expired at an earlier date). These earlier expired products include other kinds of payoff features such as callables (mostly seen in Denmark and together 17 products), which these have delivered an average return of 2.83% pa.

Capital-protected structured products are strongly dependent on the issuer’s funding level, which is the interest rate plus the spread (risk) of the issuer. The spread itself depends on the credit rating of the issuer, which is highly correlated with the risk of default of the issuer. This explains why the yield delivered by capital-protected products mainly depends on issuers’ credit risk, which is a function of their credit rating. In the recent low interest rate environment, capital-protected products can offer better returns than interest rates.

Historical performance of the capital-protected sample vs Stibor interest rate (and relevant swaps for maturities longer than one year)

With so many comparisons between investing in the underlying or keeping the investment in a fixed income investment, we have to compare capital-protected products against interest rates to understand if structured products deliver value.

The reason behind this is that an investor in a capital-protected product’s main concern is guaranteeing their capital. As such, they are willing to forego dividends and potential high returns of equity markets. The

investor has two alternatives for this problem: 1) invest in a deposit or fixed income, where they know the return they will obtain, or 2) invest in a capital-protected structured product, which still guarantees capital at maturity, but potentially provides a higher return, depending on the underlying.

Comparing every single product with the equivalent interest rate that the investor could get showcases how structured products performed and if they delivered value against the alternative of investing in fixed income products.

Overall, capital-protected structured products delivered higher returns than if the investor had decided to keep their capital in deposits. With a return of 1.99% pa, structured products delivered an extra 0.78% pa compared with the interest rates.

The extra return of these products has increased since 2014. With the usage of equity stocks baskets and worst of payoffs and with the continuation of an equity rally, investors were better off shifting from deposits to capital-protected products.

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Capital-at-risk products

Capital-at-risk products averaged a 5.85% annualised return between 2009 and 2019Q1.

Sixty-three percent of the capital-at-risk sample delivered five percent pa or more.

Twelve percent of the analysed capital-at-risk products returned less than the initial capital.

Some 29% of the products offered at or above 10% pa.

SRP analysed 3,946 matured capital-at-risk products in the Nordics with maturity dates between January 1 2009 and March 31 2019. These products initially gathered an estimated €13.96bn of sales and delivered an average annualised return of 5.85% when they matured.

The following tables highlight a few characteristics of the sample, which, as expected, broadly match the characteristics of the overall capital-at-risk market in the Nordics. In fact, as can be seen below, the typical product within the capital-at-risk sample would be a medium-term autocallable product linked to equities that offers conditional protection within a predefined fall of the underlying.

Histogram of annualised performances: capital-at-risk products (2009 - 2019Q1)

Eighty-four percent of the products which matured between 2009 and 2019Q1 delivered a positive return at the end of the investment term (3.12 years on average), according to SRP data. The majority of the products (63%) returned five percent or more, while 12% delivered less than the initial capital. Ten percent returned just the initial capital at the term of the investment.

Negatively performing products returned between -0.01% and -100% pa, resulting in an average loss of -11.32% pa. Most of the negative performances were seen in 2015, 2016 and 2018; 13%, 25% and 14% respectively from the total of the negatively performing products. Negatively performing products in 2016 represented 32% of the analysed maturities for that year because of the sideways markets and the

drop in oil prices. The share of negatively performing products dropped to five percent in 2017 and to nine percent in the first quarter of 2019.

More recently, the market saw products designed to guarantee a return within a limited fall of the underlying (typically between -20% and -30%). The rationale behind the payoff is that even if the product has not been called, the investor is still entitled to their predefined coupon. This is particularly important in the case of long-term investment strategies and when the trade levels of indices could be relatively high.

Baskets of shares and indices dominate the sample, with 1,190 products linked to different baskets (€2.86bn of sales). The most seen single underlying was the OMX Stockholm 30 index which was seen in 329 products offering an average return of 7.93% pa. The Eurostoxx 50 has been quite popular as single underlying returning 4.47% pa. The OMX Helsinki 25 has offered a great average return of 11.65% pa.

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Table 2.1: Nordics: asset classes within the capital-at-risk sample

In the capital-at-risk sample, 102 different payoff type combinations were seen. Capital-at-risk autocalls have returned an annual return of 8.72% pa.

Autocallable features paired with conditional protection are heavily present in the table above. Autocallable products pulled performance upwards significantly, since 1,466 products terminated earlier than scheduled through the activation of their knock out feature, returning an average 12.59% pa to investors. The analysis includes 1,948 products, meaning that 75% of the autocalls terminated early.

Autocallable products and partially protected strategies (knock in barrier) have been and continue to be the dominant payoff in the Nordics, because of their ability to exploit market rises while limiting losses. It should be noted that autocallables do not require any market growth (measured from the initial strike date) to provide their target returns.

Partially protected products offering participation in the performance of the underlying with or without cap (capped call, uncapped call) delivered below average performance in the capital-at-risk sample. It should be noted that most of the products were for investors who were willing to seek an unlimited upside at the cost of a limited downside. This is why the typical product with this payoff used to protect an averaged 90% of the invested capital. A higher capital protection rate was generally associated with lower participation in the upside. In contrast with products offering conditional protection through an embedded knock in barrier (protected tracker), these structures have offered a real level of capital guarantee at maturity.

The effect of the autocallable feature on the length of investment is obvious in the table below. Over a quarter (26%) of products terminated on or before their first anniversary. What is more, only one product

Table 2.2: Nordics: underlyings within the capital-at-risk sample

that had an initial eight- or 10-year maturity actually ran to term. It also means that very short-term products of a year or less will have experienced strong annualised returns (12.09 % on average for the one-year term), as this category is primarily formed of products that matured early with a positive return.

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Table 2.3: Nordics: payoffs within the capital-at-risk sample

Table 2.4: Nordics: terms within the capital-at-risk sample

Historical performance of the capital-at-risk sample vs Eurostoxx 50

Annualised capital return of structured products compared with the Eurostoxx50’s performance

Average of annualised capital return of structured products

Average of Eurostoxx 50 annualised performance

The Nordic capital-at-risk structured products market has been outperforming the equity markets for the past 10 years. According to SRP data, the capital-at-risk products have delivered an average return of 5.85% pa against four percent pa return on a direct investment in the Eurostoxx 50 for the same period.

We also observe that in the Nordics market there is a positive and extremely high correlation between the performance of the equities markets and the performance of capital-at-risk structured products.

On positive equity markets, structured products tend to outperform as long as the Eurostoxx 50 doesn’t increase above 10%. In scenarios where equity markets decline, structured products performance tend to decrease but still outperform a direct investment.

Autocallables

With performance targets and possible scenarios known in advance, autocallables fared well in sideways markets.

Fifty-one percent of the early redemption events occurred on the first observation date.

Seventy-seven percent of all autocallables recorded average annualised returns at or above five percent.

The average return of autocallables was 8.63%.

performances autocallables

An impressive 77% of all autocallable products in the sample recorded annualised returns above 5%, with only 8% returning a negative performance. The negatively performing products returned between -0.1% and -100% pa, resulting in an average of -17.86% pa. Forty-three percent of the products delivered a return at or above 10%.

The analysis found 25 different payoff type variations. The most popular was the knock out, protected tracker and worst of option combination which was used in 1,184 products in the sample. The bestperforming combination was knock out, protected tracker, uncapped call, worst of option which was seen in 11 products and offered an average performance of 16.76% pa.

Eleven percent of the autocalls were capital-protected (by volume) and these products offered an average performance of 6.18% pa compared to 8.72% pa the capital-at-risk autocalls offered.

In the Nordics 51% of products registering an autocall event on the first observation date while, as a comparison, 25% of autocallables in the Nordics reached organic maturity.

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Autocallable products maturing by observation date (2009 - Q12019)

In the Nordics, autocall products can knock out either monthly, quarterly or annually but normally the first possible knock out date is one year after the start, even if coupons are gathered or paid more frequently.

It should be noted, however, that the investment term of autocallable products is generally long enough to allow the underlying to absorb possible unfavourable market cycles from the start and to give it time to benefit from a possible subsequent rise in the financial markets. For example, the sideways evolving market in 2016 offered fewer preconditions for products being called, which was in contrast with the previous two years and in 2017, all of which saw an important number of early redemptions contributing to the excellent performance of the market.

Table 3.1: Nordics: payoffs within the autocall sample

Credit-linked products

Thirty-eight percent of all credit-linked products recorded average annualised returns at or above five percent.

The average return of credit-linked products was 3.87% pa.

The Markit CDX North America High Yield Index was the best performer (from more than 10 products maturing), offering an average annual return of 5.36%.

Some 38% of all credit-linked products in the sample recorded annualised returns at or above five percent with only eight percent returning a negative performance. The negatively performing products returned between -0.02% and -100% pa, resulting in an average of -6.65% pa. Nine percent of the products delivered a return above 10%.

Credit-linked products have been popular in the Nordics in the past few years since they offer investors partial capital protection - the risk is normally linked to companies with good reputations or credit indices linked to multiple shares. Credit-linked products offer the possibility of regular coupons, meaning good regular income for investors. Seventy-three percent of the products promised to give a quarterly or annual coupon if the underlying company/companies stay solvent. Normally the coupon payment is either stopped after a credit event or a certain percentage is reduced from the upcoming coupons per credit event.

Products linked to the credit indices such as Markit iTraxx Europe Crossover, Markit iTraxx Crossover, Markit iTraxx Europe, Markit iTraxx Europe HiVol and Markit CDX North America High Yield were popular as single indices and also as part of a basket. However, most of these products have a maturity date in the future. In the products where these were seen as single indices or with Stibor/Euribor, Markit iTraxx Europe Crossover offered an average annual return of 5.02%, Markit iTraxx Crossover offered 4.96% pa, Markit iTraxx Europe offered of 2.79% pa, Markit iTraxx Europe HiVol offered 4.4% pa and Markit CDX North America High

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Yield offered 4.03% pa. Products linked to these credit indices as single shares including those linked with Euribor/Stibor account for 11% of the market by volume.

Products linked to single shares – for instance, Swedish industrial giant Stena - have also been seen in the credit field (but they have also become more popular during recent years and have not matured yet). Stena or Stena with Stibor has offered investors an annual average of 3.31%. Products linked to Stena as single share or with Stibor have a market share of four percent by volume.

Hybrid products (43% of the market volume) linked to credit indices and to baskets, indices or shares, have offered an annual average of 3.81% whilst credit products (57% of the market volume) have offered 3.92% pa.

Table 4.1: Nordics: underlyings within the credit-linked sample

Table 4.2: Nordics: payoffs within the credit-linked sample

Performance analysis - Finland

Structured products in Finland averaged a 3.24% annualised return between 2009 and 2019Q1.

 Sixteen percent of the analysed products scored negatively.

 Thirty-two percent of these products returned five percent or more.

Performances peaked in 2017 with 5.93% pa and in 2019 Q1 the average performance per annum was 4.38%.

SRP analysed 1,829 matured Finnish structured products with maturity dates between January 1 2009 and March 31 2019. These products initially gathered an estimated €10.07bn of sales and delivered an average annualised return of 3.24% when they matured.

From the total products with performance, we concluded that 84% of the products which matured between 2009 and 2019Q1 delivered a positive return at the end of the investment term (4.08 years on average). Thirty-two percent of the products returned five percent or more.

Four percent of the analysed products delivered less than the initial capital, compared with 23% which returned just the initial (including products with overprice) at the term of the investment. On the negative side, products returned between -0.02% and -100% pa, resulting in an average loss of -6.62% pa.

As the below tables also show, the most common Finnish product has been the medium-term uncapped call linked to a basket of shares.

Historical performance of structured products - Finland (2009 - 2019Q1)

Share baskets dominate the Finnish sample, with 628 products linked to different share baskets (€3.63bn of sales). The most common single underlying was the Euribor interest rate which was seen in 65 products offering an average return of 0.64% pa. The Eurostoxx 50 index has been popular as a single underlying with 61 products returning an average of 3.98% pa. Stora Enso and UPM Kymmene as a basket delivered the biggest average return (from 10 products) - 12.86% pa. The OMH Helsinki 25 Index also delivered a good return (40 products), at 9.55% pa.

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Table 5.1: Finland: asset classes sample

Some 83 payoff combinations were seen. The uncapped call as a single structure has been the most common and has gathered the biggest sales volume, offering on average 2.3% pa. The highest average return came from five products with the knock out, protected tracker, uncapped call structure, which offered 12.19% pa.

As we can see, between 2009 and 2013, almost all of products in Finland were capital-protected. But due to the low interest rate environment, the picture has changed completely when in Q12019 75% of the products were capital-at-risk.

Table 5.2: Finland: underlyings sample

Table 5.3: Finland: payoffs

Performance analysis - Sweden

Structured products averaged a 3.56% annualised return between 2009 and 2019Q1.

A quarter of the analysed products scored negatively.

Thirty-seven percent of these products returned five percent or over.

Performances peaked in 2017 with 5.57% pa and in 2019Q1 the average performance per annum was 4.04%.

We analysed 7,833 matured Swedish structured products during 2009 to Q12019. These products initially gathered an estimated €31.57bn of sales and delivered an average annualised return of 3.56% when they matured.

From the total products with performance, 75% of the products which matured between 2009 and 2019Q1 delivered a positive return at the end of the investment term (3.61 years on average). Over onethird of the products (37%) returned five percent or more.

Only five percent of the analysed products delivered less than the initial capital, compared with 29% which returned just the initial (including products with overprice) at the term of the investment. On the negative side, products returned between -0.01% and -100% pa, resulting in an average loss of -4.29% pa. On the positive side, products returned between 0% and 152.2% pa, resulting in an average gain of 6.11% pa.

As the below tables also show, the most common Swedish product has been a medium-term uncapped call linked to baskets, similar to what has been seen in the whole Nordics region.

Histogram of annualised performances - Sweden (2009 - 2019Q1)

performance of structured products - Sweden (2009 - 2019Q1)

Share baskets dominate the Swedish sample, with 2,338 products linked to different share baskets (€8.14bn of sales). Single indices were also popular - 1,932 products were captured in the sample linked to single indices meaning a volume of €8.86bn. The most common single underlying was the local OMS Stockholm 30 index which was used in 588 products offering an average return of 5.52% p.a. The Eurostoxx 50 index was also quite popular as single underlying returning 3.01% pa.

Historical

Table 6.1: Sweden: asset class sample

Table 6.2: Sweden: underlyings sample

Table 6.3: Sweden: payoffs sample

Sweden has seen 128 payoff combinations in the period under review. The uncapped call as a single structure has been the most common and has also returned the biggest sales volume. It offered an average return of 1.67% pa. The highest average return came from 10 products with a knock out, protected tracker, uncapped call structure which offered 20.29% pa.

The change from capital-protected products to capital-at-risk products is not as dramatic as in Finland but there is still a clear shift after 2013 to more capital-at-risk products when, in Q12019, 60% were capital-at-risk.

Do structured products deliver on their promise?

SRP’s performance analysis of the Nordic markets makes it clear that structured products do deliver on what they promise when compared to both equity and interest rates alternatives. Structured products averaged a 3.38% annualised return between 2009 and 2019Q1 while just under one-quarter scored negatively.

Performance has been increasing since 2009 though market conditions have meant that, naturally, some high and lows have been observed over the years. We can conclude that 78% of the products which matured between 2009 and 2019Q1 delivered a positive return at the end of the investment term, according to SRP data with over one-third (37%) providing investors with five percent or more. Twentynine percent returned the initial capital, while five percent returned less. The negative performances returned between -0.01% and -100% pa, resulting in an average loss of -4.44% pa. The positive performances returned between 0% and 152.22% pa, resulting in an average gain of 5.64% pa.

Capital-protected products weathered both global financial and European sovereign debt crises, where they managed to preserve the invested capital, although delivering continuously decreasing yield to investors. Overall, capital-protected structured products delivered higher returns than if investors had decided to keep their capital in deposits.

When it comes to the Nordics, the capital-at-risk structured products market has been outperforming the equity markets for the past 10 years. According to SRP data, these types of products have delivered an average return of 5.85% pa against four percent pa for a direct investment on the Eurostoxx 50 for the same period. This means that structured products were a better investment than the equity markets, for the past 10 years.

Despite the continuously decreasing low interest rates more standardised structured formulas, supported by rising equity markets, delivered positive performances. Maturities between 2012 and 2018 have displayed a steady increase in their returns, slightly interrupted in 2016 when markets were affected by the Chinese stock market crash and the collapse in oil prices.

We can conclude that products with an early redemption knock out feature (ie autocallables) have significantly improved the average capital return across all payoffs that they have been used in combination with. Some 77% of all autocallable products in the sample recorded annualised returns above five percent, with only eight percent returning a negative performance. Forty-three percent of the products delivered a return at or above 10% and the average return of autocallables was 8.63%.

Credit-linked products also fared well with some 38% showing annualised returns at or above five percent with only eight percent returning a negative performance. Nine percent of these products delivered a return above 10%.

SRP’s Nordics performance report, the first of its kind, has painted an overall positive picture of the regional structured products markets. While, inevitably, some areas of uncertainty and criticism remain, as in every market, the future looks bright for the structured retail product market based on its historical performance as presented in this landmark report.

www.structuredretailproducts.com

www.structuredretailproducts.com