Data & editorial: Yordan Ivanov; Milena Tyanenova and Amélie Labbé
If you are interested in having a similar bespoke report produced for your organisation, please contact Reihaneh Fakhari at Reihaneh@structuredretailproducts.com
This is the first performance report that SRP releases for the Canadian market, and it comes at an interesting time for the structured product market.
The period covered by the report, from 2015 to July of this year (2020), has been eventful, including several regional crises, uncertain commodity prices, economic and political tensions, and, more recently, a global pandemic.
However, during these testing times, as the study shows, structured products have proven their worth - they deserve to be an integral part of Canadian retail investor portfolios, allowing access to tailored investment strategies while diversifying risk exposure.
Our industry has been on the receiving end of criticism relating to the performance of the products, their perceived complexity and their ability to deliver what they promise. This is why SRP has endeavoured to measure performance precisely and independently, a crucial task that we hope will go a long way to support the credibility and viability of this industry.
According to this report, historical data shows that structured products in Canada have been on an upward trajectory performance-wise from 2017 onwards. Coincidently, that period is also marked by a shift from principal protection to principal-at-risk strategies, and the introduction of autocall structures.
SRP data shows that structured products in Canada averaged a nearly five percent annualised return between 2015 and 2019 with only one percent scoring negatively. The average performance for 2020 (until the month of July) was 4.35% reflecting the uncertainty surrounding Covid-19. The level of negative returns has - so far - stayed relatively low.
Comparisons with the S&P TSX 60 Total Return have shown that structured products can hold their own. They have provided persistent protection from market downfalls and have generally outperformed the benchmark as long as it did not increase above eight percent.
SRP would like to thank the Canadian structured product market without whose support (and data!) the production of this report would not have been possible. The work of SRP’s team of analysts covering the Canadian market has also proven invaluable.
For any information, please get in touch with the team below.
Yordan Ivanov Team Leader, Americas e: Yordan@StructuredRetailProducts.com Raúl Enciso-Pórtoles Sales Manager e: Raul@structuredretailproducts.comThis report analyses the performance of structured retail products marketed in Canada. The analysed data includes a total of 8,180 tranche products collected in the StructuredRetailProducts.com Canada database, which covers over 29,000 tranche products, of which 13,652 are live year-to-date.
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. SRP will calculate the performance of income products as the sum of the capital return at maturity plus any paid coupons. The returns shown are gross. The study analyses only products for which SRP has collected or calculated performance.
Out of the 9,401 structured products that have matured or expired in Canada in the period from 2015 to 2019, SRP has collected or calculated performances for 8,180, or 87%. From those, 4,423 are capitalat-risk products, representing 54.2% of all maturing products and 3,757 are capital-protected products, representing 45.8% of all maturing products. The dataset reflects the performances of 74 different payoff structures, as well as over 500 unique sets of underlying assets and 13 issuing manufacturers.
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 the CDOR 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 S&P/TSX 60 Index TR 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 S&P/TSX 60 Index was the single benchmark index which gathered most of the sales volume.
www.structuredretailproducts.com
Structured products averaged a 4.9% annualised return between 2015 and 2019.
Only one percent of the annualised products scored negatively.
Performance has been increasing since 2016, though there was a slight dip in 2018 (5.18%).
Last year (2019) marks the highest annualised return for the period with 6.26% pa.
Annualised performances 2015-2019
According to SRP data, from the total products with a performance, 90.47% of the products which matured or expired between 2015 and 2019 delivered a positive return at the end of the investment period (2.97 years on average). The positive performances returned between 0.01% and 50% (annualised) resulting in an average gain of 5.88% per annum. Forty-three percent of the products returned upwards of five percent.
Eight percent of analysed products returned the initial capital invested, while one and a half percent returned less. The negative performances returned between -0.04% pa to -94.19% pa, resulting in an average loss of -10.98% pa.
The 2016 Chinese stock market crash and the collapse of oil prices had an impact on the performance of Canadian products resulting in the lowest annualised return of 3.7%.
Historical data shows a strong upward trend in the performance of structured products from 2017 onwards. Coincidently, that period is also marked with a shift from principal protection to principal-atrisk strategies, and the implementation of autocall structures. It was also observed that products with an early redemption feature - autocallables - have significantly improved the average capital return across all payoffs that they have been used in combination with.
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).
The second category, which has become the most common in the current 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.
The year 2017 was pivotal for the Canadian structured product market. Since then, capital-protected maturities have given way to capital-at-risk products. 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.
Canadian providers have addressed the need of higher yields and capital protection by implementing defensive capital-at-risk structures aiming to offer a return in slightly increasing to neutral markets. The autocallable mechanism whereby products with longer maturities have the possibility to redeem early has become a signature payoff feature for the Canadian structured product market. In 2019 alone, products with an autocall feature took 85% of total principal-at-risk matured products. We will elaborate more on the autocallable payoffs further in this report.
Historical performance: capital-protected vs capital-at-risk
www.structuredretailproducts.com
The average annualised return of capital-protected products for 2015-2019 was 2.73%.
Sixty four percent of products delivered 2% pa and higher.
The most preferred underlying was the S&P/TSX 60 Index.
Principal-protected autocalls had an average annualised return of 6.15%.
Prevailing low interest rates have gradually restricted the issuance of capital-protected structured products. Of the 12,395 products issued between 2017 and 2019, 4,899 protected at least 90% of the nominal invested which is approximately 39.5% of the total issuance. The share of capital-protected products has been decreasing: in the period between 2014 and 2016, there were 5,535 products and principal-protected products took just over 50% of total. Seeking to offer yield in a low interest rates environment, providers have gradually shifted from fully capital-protected products to structures with conditional protection.
Annualised performances: capital-protected products
We analysed 3,756 matured Canadian capital-protected products with maturity dates between 1 January 2015 and 31 December 2019. These products initially gathered an estimate of US$26.67bn in sales and delivered an average annualised return of 2.73% at maturity. The very low standard deviation of 0.07 unit points indicates a steady return throughout the observation period. Nearly nine percent of the analysed products returned the initial investment and 84% have delivered a return of up to five percent.
The tables below highlight a few characteristics of the sample, which broadly match the characteristics of the overall capital-protected market in Canada. In fact, the typical principal-protected product within the sample is a two- to six-year capped call structure linked to a basket of shares or indices.
Equity is the preferred asset class in the Canadian structured product market with equity share basket taking top position. Canadian investors seem to favour highly versatile share baskets, if one takes into account the 213 unique share combinations on the market during the observed period.
According to SRP data, almost 11% (eight percent of sales) of total principal-protected products were linked to the S&P/TSX 60 Index making it the preferred underlying for the analysed period. The mean annualised return of the index was 2.87% which is above the market average of 2.73%. Products linked to the S&P 500 took three percent of total sales and outperformed the majority of underlyings with an average annualised return of 3.84%.
Underlyings within the capital-protected sample
Capped call structures dominated the sample taking 48.7% of the total with an average term to maturity of 3.6 years and an above average performance. The participation ranges from 50% to 140% of the growth of the underlying with a mean just over 100%. The typical uncapped call product was linked to an equity basket predominantly including S&P/TSX Capped FINCLS, Eurostoxx 50, FTSE 100, Nikkei 225, S&P 500, S&P/TSX 60 Index and S&P/TSX Capped Utilities Index. The simple structure, the final valuation at the end of the term rather than arithmetic averaging throughout, and full participation allowed the typical product to take good advantage of the performance of the underlying. Considering a good overall underlying growth during the observation period uncapped calls performed even better with return of 3.35% pa.
Another well performing payoff that dominates the Canadian capital-at-risk department is the autocall. 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 four percent.
Portfolio insurance as single payoff has delivered an average performance of 0.36% pa. These mediumto long-term products dynamically allocate between a risk-free asset and a risky portfolio, seeking to combine upside potential with a capital guarantee – and good returns, usually. However, in this case, all of the products were issued in the beginning and during the great financial crisis with some having First Asset/Blackrock NA-RTS as an underlying.
One hundred and eleven products had the potential to mature at a date other than the one planned (callable: 88 and knock-out: 32). However, only 32 products, all autocalls and predominantly issued in 2018, expired earlier than anticipated. Hence most principal-protected products with an autocall feature expired within a year, returning an average annualised return of 6.15% - over twice the average for principal protection. The notes were linked to either equity baskets or equity indexes. The typical basket was BCE, Canadian Imperial Bank of Commerce, Cineplex, Emera, Enbridge. Evidently autocallable principal-protected notes show high potential for investors.
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 itself 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.
www.structuredretailproducts.com
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 an average return of 2.73% pa, structured products delivered an extra 0.91% pa compared with the interest rates. The final quarter of 2019 has shown remarkable performance with an average return of 3.1%. In conclusion, investors were better off shifting from deposits to capitalprotected products.
Capital-at-risk products averaged a 7.1% annualised return between 2015 and 2019.
Eighty-seven percent of the capital-at-risk sample delivered 5% pa or more.
Less than 3% of the analysed capital-at-risk products returned less than the initial capital.
Some 20% of the products offered above 10% pa.
SRP analysed 4,423 matured capital-at-risk products in Canada with maturity dates between 1 January 2015 and 31 December 2019. These products initially gathered an estimated US$13.6bn of sales and delivered an average annualised return of 7.1% 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 Canada. 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.
Ninety-seven percent of the products which matured between 2015 and 2019 delivered a positive return at the end of the investment term (2.1 years on average), according to SRP data. Eighty seven percent of the products returned five percent or more, while only 2.6% returned less than the initial capital. Less than half of a percent returned just the initial capital at the term of the investment. Negatively performing products returned between -0.05% and -72.2% pa, resulting in an average loss of -11.5% pa. The highest average negative performances were seen in 2016, 2018 and last quarter of 2019; -11.4%,-13.7% and -13.6% respectively from the total of the negatively performing products.
Equity single index and equity share baskets dominate the sample making 93% of total products with US$12.2bn of sales. The top three most seen single index underlyings were the S&P/TSX 60 Index (1051) with 5.77%pa, the Eurostoxx 50 (557) with eight percent pa and the S&P/TSX Composite Index Banks (225), which offered an excellent average return of 8.93%. However, the best performing single index was the BMO Equal Weight REITs Index ETF: it had 32 products linked to it and returned an impressive 16.03% pa.
www.structuredretailproducts.com
In the capital-at-risk sample, 49 different payoff type combinations were seen. Capital-at-risk products with an autocall make up 75% of total risky products have on average returned 8.3% pa.
The best performing payoff within the autocall group had the coupon memory feature and on average gave back 11.91% pa. Investors in such notes are entitled to receive a predefined coupon on the coupon payment date if the reference portfolio return has met the required coupon payment threshold and collect all previously missed coupons due to lower than required underlying performance. Ninety-nine percent of the autocallables are paired with a conditional protection at maturity ranging from 10% to 55% with a mean of 27%.
In 2019, autocallable products pulled performance upwards significantly, since 1,201 products terminated earlier (average term of 1.37 year) than scheduled through the activation of their knock-out feature, returning an average 9.1% pa to investors. In comparison, in 2018, early terminations were only 691 with an average performance of 8.77% pa. In 2017, there were 971 expired autocalls that gave back on average 8.18% pa.
The analysis includes 3,334 autocall products: from those 3,227 or 96.7% terminated early with a mean return of 8.64% pa, giving investors a higher than average return of 6.95% pa for risky products. Autocallable products have been and continue to be the dominant payoff in Canada, because their ability to exploit market rises while limiting losses has paid off generously.
Products offering participation in the performance of the underlying with or without cap (capped call, uncapped call) delivered a below average performance in the capital-at-risk sample. It seems those products
were for investors who were willing to seek an unlimited upside at the cost of a limited downside. A higher capital protection rate was generally associated with lower participation in the upside.
The effect of the autocallable feature on the length of investment is obvious in the table below. Over fifty percent of products terminated on or before their first anniversary. What is more, only one product that had an initial 10-year maturity actually ran to term. Very short-term products of a year or less have experienced strong annualised returns (9.12 % on average for the one-year term).
01/04/201501/06/201501/08/201501/10/201501/12/201501/02/201601/04/201601/06/201601/08/201601/10/201601/12/201601/02/201701/04/201701/06/201701/08/201701/10/201701/12/201701/02/201801/04/201801/06/201801/08/201801/10/201801/12/201801/02/201901/04/201901/06/201901/08/201901/10/2019
It is observable that in the Canadian market there is a strong positive 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 S&P TSX 60 Total Return does not increase above eight percent. In scenarios where equity markets decline, structured products performance tend to decrease but still outperform a direct investment.
Sixty-one percent of the early redemption events occurred on the first observation date.
Eighty-four percent of all autocallables recorded average annualised returns at or above five percent.
The average return of autocallables was 8.3%.
Less than one percent of autocalls had negative return.
An impressive 84% of all autocallable products in the sample recorded annualised returns above five percent, with less than one percent returning a negative performance.
The negatively performing products returned between -3.6% and -39.1% pa, resulting in an average of -17.7% pa. Twenty-three percent of the products delivered a return at or above 10%. The analysis found 16 different payoff type variations. The most popular was the knock out, reverse convertible combination which was used in 1,102 products in the sample. Some of the best performing combination were knock out, reverse convertible, snowball and knock out, reverse convertible, worst of option offering an average performance of 11.9% pa and 18.76% pa respectively.
Thirty-two percent of the autocalls were capital-protected and these products offered an average performance of 5.3% pa compared to the 8.3% pa the capital-at-risk autocalls offered.
Sixty-one percent of products registered an autocall event on the first observation date while three percent of autocallables reached organic maturity.
www.structuredretailproducts.com
Canadian autocall products can knock out either monthly, quarterly, semi-annually or annually but normally the two most popular first possible knock out dates are either six months or a year after the start, even if coupons are gathered or paid more frequently.
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. The number of autocalls per year is a good indicator of overall financial market conditions. For example, the market in 2016 offered fewer preconditions for products being called, which was in contrast with the previous two years and in 2017 and in 2019.
Overall the performance of the Canadian autocalls has a strong positive trend throughout the observed period indicating to continue to outperform in the future.
The year 2019 was a good one for structured products, the highest performing in the past five years. The continuation of good structured products performance seemed inevitable considering the strong January results of over eight percent pa. February was marked by an all-time high for the S&P 500. However, just a month later, the index fell by 34%: on 12 March 2020, the World Health Organisation declared COVID 19 to be a global pandemic which was followed by an immediate response from the stock markets.
The average annualised structured product performance fell sharply to 3.3% in March from 7.6% in February and 8.3% in January, and continued to decline reaching its lowest point in June with an average of 2.3% pa. Some signs of recovery appeared in July.
Like-for-like calculations showed that whenever the S&P TSX 60 Total Return performance was at its lowest (one percent) structured products had performance three times as high, providing security and better returns. Less than two percent of products had a negative return whereas eight percent returned the initial capital. In comparison, one percent showed below initial investment returns and eight percent return nothing during 2015 and 2019.
www.structuredretailproducts.com
Annualised performance January to July 2020
Considering the severity of the financial turmoil that Covid-19 helped launch in a very short amount of time, the Canadian structured product market proved to be well prepared and managed to minimise losses that could have been far greater had the capital been directly invested.
Annualised capital return of structured products compared with S&P/TSX 60 Total Return (like-for-like) January to July 2020
Average of annualised performance of S&P/TSX 60 Total Return (like-for-like)
Average of annualised performance of structured products
SRP’s performance analysis of the Canadian structured product market has shown they can generate higher returns and, at the same time, provide high protection against market downfalls. Structured products averaged a nearly five percent annualised return between 2015 and 2019 with only one percent scoring negatively. The average performance for 2020 (until the month of July) was 4.35% reflecting uncertain markets due to Covid-19. The level of negative returns has so far stayed relatively low though we are yet to see future developments and how these could affect structured products.
Overall performance has been increasing since 2017, the year when the Canadian market switched from being predominantly principal-protected to being principal-at-risk focused. During the period between 2015 and 2019, over 90% of products delivered a positive return at the end of their investment term. Furthermore, nearly 55% returned over five percent pa to investors, ands eight percent returned the initial investment.
Capital-protected products averaged an annualised return of 2.75% between 2015 and 2019 with 35% returning above three percent pa. Principal-guaranteed autocalls have proven highly successful for investors returning on average 6.15% pa. A like-for-like comparison with risk free rates has shown that structured products delivered higher returns than if investors had decided to keep their capital in deposits.
According to SRP data, capital-at-risk structured products have delivered an average return of 7.1% pa. Some 87% of the products returned five percent or more, while only 2.6% returned less than the initial capital. Less than half of a percent returned just the initial capital at the term of the investment whereas 20% secured an annualised return of 10%. Comparisons to the S&P TSX 60 Total Return showed persistent protection from market downfalls and a tendency to outperform as long as the S&P TSX 60 Total Return did not increase above eight percent.
Products with a knockout feature are the speciality of the Canadian structured product market, making up 40% of the total products that matured or expired between 2015 and 2019. In 2019, they accounted for 51% of the total.
We can conclude that products with an early redemption knockout feature (ie autocallables) have significantly improved the average capital return across all payoffs that they have been used in combination with. Performance has been persistently on the rise during the main observation period with an average return of 8.3% pa with less than one percent scoring negatively. Some 65% of all autocallable products in the sample recorded annualised returns above five percent.
The Application Programming Interface (API), is a web-based software application which allows clients to access our data in a controlled manner & integrate it using their own software packages & systems.
• Download real time SRP data directly to excel
• Receive market share on each asset class/payoff for each company of interest
Interrogate.
• Monitor & increase your market share
• Carry out accurate trend analysis with comprenhensive product data spanning over 15 years in seconds
• Import data directly into in-house systems/platforms and interrogate the data and risk more effectively
• Combine data sets with other products and visualise it in the context of the larger business
www.StructuredRetailProducts.com/srp-api