Expert view: Star autocall

EXPERT VIEW

Another UK distributor IDAD also currently has a product with the star feature available in the offshore market. It is issued by BNP Paribas and called the One Star Effect Reducing Autocall. This is linked to four stocks: Advanced Micro Devices, Carnival Corporation, Tesla, and Zoom Video Communications. This product pays an annual return of 23% if all four underlyings are above the required autocall levels at which point the product terminates. The first autocall point is after one year and the autocall level is 100% of the initial level. During the life of the product, the autocall level is reduced by 2.5% at each quarterly point down to 60% for the last five autocall dates.

The product has European barrier of 50% which will be breached if one of more of the underlying stocks are below this level at maturity. However, because of the star feature, if the barrier is breached and one of the remaining stocks is at or above 100% of its initial level, capital will be returned in full.

The table shows a summary of output from the Structured Edge research report on the IDAD product compared with an autocall structure with the same schedule of payments and barrier level but no star feature. The simulated probabilities are calculated using FVC’s pricing models, independent market data and projected equity growth rates based on long term historic market performance. The results demonstrate the effect of the star feature on the potential return of capital for the IDAD product. Introducing the star feature decreases the chance of capital loss from 31.08% to 21.71%.

The initial estimated price difference between the IDAD product and the control was in excess of 5%. This is a significant difference and shows that the feature comes at a cost which will reduce the potential returns of the product. An autocall without the star feature could have offered a coupon in excess of 28% for the same overall cost structure.

Both of these example products are defensive autocalls linked to baskets of stocks. At the time of the analysis of the IDAD product, the one year at-the-month volatilities for the stocks were typically over 35% and correlation levels between 70% and 85%. The product offers a high return of 23% p.a. and has a deep barrier of 50% with the additional protection of the star feature which will benefit investors in different scenarios such as increased volatility and one stock performing adequately even if one of the rest suffers a large fall.

Disclaimer: the views, information or opinions expressed herein are those of FVC, and do not necessarily reflect the views of SRP.

The star feature is an enhancement to the standard European barrier

ANALYSIS

Market analysis: UK structured products index beats FTSE 100

The UK structured product market has had a strong start to 2022 continuing the pattern of increased issuance and sales volumes that has been witnessed in the past two years.

The numbers suggest that the market is on track to exceed the previous highs of 2017 and 2018. These were reached before the twin effects of Priips and Covid impacted product issuance. In the case of PRIIPs it was the accompanying regulatory burden. Covid interrupted normal market operations and bank ability and appetite for new business.

Structured Retail Products (SRP) and FVC are collaborating in bringing a new structured product lifecycle and portfolio management application named StructrPro to the US market which will be fully launched by the end of April 2022. This service will allow users to track and analyse products from the universe of over 45,000 open or recent products in the US market covered by SRP.

Combining SRP’s US product database and FVC analytics will give market participants such as banks, distributors and advisors powerful tools to gain insight into the structured products in the market and in individual portfolios.

In the UK, FVC has provided analysis and comparison metrics on retail structured products for over twenty years through its advisor service StructuredEdge. This service contains an initial pre-sales analysis available during the product offer period for advisors. By combining the StructuredEdge database of products with new performance measurement functionality that FVC has now developed it is possible to take a closer look at the UK structured product market providing breakdowns and performance statistics.

This article will focus on UK retail structured products that have appeared on structurededge.co.uk with a strike date on or after 1 July 2017, representing nearly five years of new products. Since most UK products have a maturity of between five and ten years this means that most product maturities in this universe are due to early maturity (autocalling) rather than reaching their final maturity date. Part of the focus of the approach is to combine matured and live products to give an overall picture of market performance.

Table 1 shows the distribution of returns of matured products. The most frequent annual return is the bucket of between 7.5% and 10% per annum and in total over 92% of the universe have returns of at least 7.5% per annum. This is made up of products which have called paying income over their lifetime or the final snowball return amount.

Table 2 shows product returns for all products analysed consisting of both live and matured products. For live products the return is calculated using the latest independent valuation calculated by FVC for the product including previously observed cash flows.

Table 1: Frequency of return per annum for matured products in UK

*Products striking on or after July 2017 Source: FVC