Data & editorial: Iveta Pekova and Gabriela Petrova
Production: Paul Pancham
Marketing: Monique Kimona Bonnick
If you are interested in having a similar bespoke report produced for your organisation, please contact Raúl Enciso-Pórtoles at Raul@structuredretailproducts.com
This is the first performance report that SRP releases for the Italian market, and it comes at a truly testing time for the structured product market.
The period covered by the report, from 2014 to June of this year (2020), has been eventful, and included several regional crises, troubled markets, economic and political tensions, and, more recently, a global pandemic.
However, in spite of this uncertainty, as the study shows, structured products have proven their worth - they deserve to be an integral part of Italian 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 averaged above four percent annualised return with just 13% of products delivering a negative performance. Reading these numbers, we should take into account that the Italian market is highly principal-at-risk oriented, with a present trend towards even higher risk-return payouts.
The average performance for 2020 was 0.45% at the end of June, reflecting the uncertainty surrounding Covid-19. The level of returns has so far stayed positive but relatively low.
Comparisons with the FTSE MIB 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 Italian 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 Italian market has also proven invaluable.
For any information, please get in touch with the team below.
Gabriela Petrova Team Leader, Europe e: Gabriela@structuredretailproducts.com Raúl Enciso-Pórtoles Sales Manager e: Raul@structuredretailproducts.comStructured Retail Products (SRP), part of the Euromoney group of companies, is the leading online resource for the global structured products industry. With over 3,000 registered users and more than 27 million product listings (as of September 2020), 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 provides an analysis of the performance of structured retail products distributed in Italy that matured or expired between 2014 and the first half of 2020 (2020 H1). The analysed data includes 5,322 products and it is compiled from the StructuredRetailProducts.com Italy database, which covers over 22,000 products, of which 6,411 are live year-to-date.
The term structured product refers to an investment product designed to provide a return that is predetermined with reference to the performance of one or more underlying markets. A structured product is typically comprised of a bond and an option, with the former to guarantee capital protection at maturity, and the latter protect capital, achieve a higher return, or both.
The performance data has been extracted from public sources and submissions from market players. Additional performance data has been calculated in-house and is based on the performance of the underlying over the investment period.
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.
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This report analyses the performance of structured retail products distributed in Italy (please see page 4 for breakdown of data).
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 8,802 structured products that have matured or expired in Italy in the period from January 2014 to June 2020, SRP has collected or calculated performances for 5,322 (or 60.5%). Of these, 5,046 products are principle-at-risk certificates representing 95% of the products and 276 products are principal-protected certificates that represent five percent of the sample. The majority of the principalprotected products in Italy are structured bonds that are not included in this analysis. The abovementioned data reflects the performances of 114 different payoff structures, as well as 1,235 unique sets of underlying assets and 35 issuing entities.
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 Euribor interest rate. Returns of capital guaranteed products with longer terms have been compared to the interest swap rate of 18 months to 10 years, depending on the maturity of the products.
SRP opted for Italian domestic benchmark FTSE MIB to compare capital-at-risk products, as a high proportion of the products covered by this report will be equity-linked. The typically high correlations between equity index underlyings should also make the local domestic index an acceptable benchmark when the product is linked to foreign equity indices.
Key points
Structured products averaged a 4.26% annualised return between 2014 and 2020 H1.
Some 13% of the products had a negative return and 21% delivered more than 10% annualised return.
The year 2017 saw the highest average performance, at just over 7.8%.
Eighty-two percent of all analysed products delivered a positive return and 60% delivered more than five percent per annum. Five percent of the certificates returned only the initial investment with no growth, while 13% didn’t manage to protect the capital and lost an average of just under 25% of the capital per annum (or 30% of the capital overall). Some ninety percent of the observed products with capital at risk offer a buffer barrier at maturity that has an average of 67% of the initial level.
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The low points in the performance during the observed period reflected two events that led Italy’s economic system to contract - the Italian banking crisis that developed in 2016 and the national political crisis in 2018 that followed a prolonged period of failure to form a stable government. Nevertheless, even at the peak of the crisis, structured products manage to deliver a positive average return of 1.3% and 2.6% in 2016 and 2018 respectively. In between its lowest performance, the structured products market reached its highest annual average of 7.8% in 2017.
The Covid-19 global crisis led to another downfall in the performance of the certificates in Italy, but the latter chapters will elaborate on this.
To ensure that we analyse the performance of these products correctly, we distinguish between two main structured product families, depending on whether capital protection is present at maturity. With the former, investors recover at least 90% of their initial investment at maturity (except in case of bankruptcy, default of payment or resolution of the issuer).
The latter, which has become the most common category due to 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 original investment, depending on the performance of the underlying. Typically, these types of products offer conditional or partial protection against a decline in the underlying of typically 30%, 40% or even 60% 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.
Principal-at-risk investments represent the vast majority of structured products during the observed period: 95% of all products analysed. From 2014 onward, when capital-protected products accounted for 16% of the market, there is a present trend towards more risk-oriented investments. In the last three
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and a half years, capital-protected products made up just 3.5% of the products. One reason for this is the interest rate level that has been declining at a steady rate since 2014 to reach its lowest point in the last 25 years in March 2020.
In a long-term low rate environment, investors are looking for better risk-return payout by increasing their risk profile. Beyond that, the low interest rate environment has made it difficult to allocate resources for buying options at inception. Many of the at-risk certificates, however, still address the need for both yield and capital protection by developing defensive capital-at-risk structures aiming to offer a return in slightly increasing to neutral or even bear markets. This has been widely achieved with the use of the autocallable mechanism whereby products with longer maturities can be redeemed early. We will elaborate more on the autocallable payoff further in this report.
Throughout the observed period, capital-at-risk products reflected more narrowly the current economic situation, while capital-protected products maintained a steady return, with both categories reaching an all-time low in the second quarter of 2020.
From 2017 onwards, capital-protected products, offering protection between 90 and 100%, started to rise at the expense of fully capital-protected products, representing 70% of the products by 2020. That is why the average performances of capital-protected products averaged a little over two percent between 2017 and 2020 H1, compared to an average of 2.75% the years before.
Capital-protected products outperform when they return only the pre-established protected capital, as generally a direct investment in the underlying would mean a loss of capital.
More than 59% of the capital-protected products delivered a positive return, with an average of 3.56% per annum.
The most preferred underlying was the Eurostoxx 50, accounting for 16% of the products.
SRP analysed 276 matured capital-protected products in Italy with maturity dates between January 2014 and June 2020. These products initially gathered €12.2 billion in sales and delivered an overall average annualised return of 2.52% when they matured.
Prevailing low interest rates have gradually constrained the issuance of capital-protected structured products. Of the 10,790 products issued between 2014 and 2020, only 593 protected at least 90% of the nominal invested which is approximately 5.5% of the total issuance. Of those, 65% guaranteed at least 100% capital return at maturity, while the remaining 35% offered protection varying between 90% and 100%.
Fifty-nine percent of the analysed products that guaranteed at least a 90% capital return offered to investors at maturity the initial investment plus a positive return, while 29% protected the invested capital fully without delivering growth at maturity. The rest 12% delivered back less than the initial investment but within the limits of the guaranteed capital with an average return of -1.5% per annum (or 94% of the capital).
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Historical annualised performances – capital-protected products (2014-2020 H1)
Capital-protected structures delivered over 1.8% annualised return in each of the observed years, with the sole exception of 2020, when returns averaged 0.6% per annum. We will explore the performance of protected certificates compared to a risk-free benchmark further in the report.
The Italian market for structured products comprises mainly of equity investments, whether shares or indices, accounting for just over 85% of the products. Of those, the best performing asset class is the index basket with a 4.70% market share.
While, naturally, the worst performing asset class is the share basket, as the downfall of a single component usually cancels out the neutral or rising performance of the other components. The investment structure suggests that for a positive return at maturity, all components are expected to rise, but a negative performance can be directed by just one component.
The next most popular choice of investment are the certificates linked to FX rates that capture 5.35% of the products.
The digital payoff dominates the sample of capital-protected products, taking a 46.1% market share, and an average performance of 1.76% annual capital return. The structure offers a conditional coupon that allows investors to capture the rise in the markets throughout the life of the investment. Of those, 10% offer an additional memory feature that pays all unpaid coupons at a coupon event. Seventy-five of the digital products offer full capital return at maturity.
Another preferred structure for the capital-protected products in Italy is the capped call payoff with a 42.3% market share, and an average performance of 2.28% annual capital return. Of those, 13% offer capital protection below 100% and annualised performance of 1.34%, while 87% offer full capital return at maturity with 3.21% average performance. The structure offers an average term of 4.5 years and 100% participation in the positive performance of the underlying asset at maturity up to a specific level.
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The underlying performance of 17% of those exceeded the limits of the cap, and these products returned the maximum payout possible, while 16% delivered less than the initial capital.
The uncapped call is another well performing payoff with a 3.6% market share and five percent annual performance, 2.5 points above the average. The simple structure offers unlimited participation in the underlying, ranging between 41% and 310%. The typical uncapped call is linked to an equity benchmark index.
In terms of investment duration, the capital-protected products have an average of 4.6-year term. Even though present, the autocallable feature is not very popular in this category, and just one percent of the products observed reached the end of the investment before the predefined maturity.
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 yield delivered by capitalprotected products mainly depends on issuers’ credit risk, which is a function of their credit rating.
This explains why the period of the banking crisis that developed fully in 2016, is the only point in the observed sample where capital-protected products did not outperform the interest rate. In fact, compared to the interest rate, the capital-protected structured products not only offer protection, but capture the rising of the markets, delivering average monthly performance as high as nine percent.
Average
Average
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 2.52% pa, structured products delivered an extra 2.36% pa compared with the interest rates. The year 2019 has shown remarkable performance with an average return of 3.75%. In conclusion, investors were better off shifting from deposits to capitalprotected products.
Capital-at-risk products averaged a 4.36% annualised return between 2014 and 2020 H1.
Seventy-one percent of the capital-at-risk sample delivered 4% per annum or more.
Some 13% of the analysed capital-at-risk products returned less than the initial capital.
Nearly one-quarter (22%) returned more than 10% with an average of 16.7% per annum.
SRP analysed 5,046 matured capital-at-risk products with maturity dates between January 2014 and June 2020. These products initially gathered €34.48 billion in sales and delivered an average annualised return of 4.36% 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 Italy. In fact, as shown below, the typical product within our capital-at-risk sample would be a three- to five-year autocallable product linked to a domestic share that offers conditional protection within a predefined fall of the underlying.
Eighty-four percent of the capital-at-risk products which matured between 2014 and 2020 delivered a positive return at the end of the investment term (1.4 years on average), according to SRP data. The vast majority of the products (71%) returned four percent or more, and 22% returned more than 10% with an average of 16.7% per annum. Just 13% of the analysed products delivered less than the initial capital and only three percent returned the full capital invested at the term of the investment. Negatively performing products returned an average loss of -26% pa.
The capital-at-risk structured products followed more strictly the movement of the markets during the observed period, reflecting all three crises in 2016, 2018 and the Covid-19 one in 2020. During times of market disturbance, structured products delivered an average of 1.45% annualised return, while during stable economic conditions, the average performance was 6.04%.
Within the capital-at-risk category, equity investments are the most popular choice as well, comprising a little over 93% of the market share. The best performing asset class – the share basket with an average performance of 7.24% pa, consists mainly of bonus certificates that manage to return their maximum payout at maturity and autocallables, that delivered positive return between the first half and the second years of the investment. The average term within the shares basket is just 1.8 years. The typical share basket consists of equally distributed domestic and foreign stocks.
Autocallables with conditional protection are the dominant payoff on the Italian structured productmarket, accounting for almost 70% of the products.
Autocallable products and partially protected strategies are preferred for their ability to gain from neutral or rising markets limiting their losses. Typically, autocallables do not require any market growth after the strike date to provide their target returns. Furthermore, step down strategies, offering decreasing knock in barriers, can deliver significant growth even in bearish markets. With performance targets known in advance and returns between six and 10% per year, the autocallable structures are perceived as one of the best structured solutions in the current environment.
Capped call, representing the bonus certificates, account for another 10% of the sample. Along with cash collect certificates, the bonus certificates are usually offered as a direct listing. In the last couple of years, the secondary market offers saw a substantial increase compared to the primary market, as banks were trying to incorporate structured products in their clients’ portfolios, by using them as a means of diversification. Commonly, the bonus certificates’ underlying asset is observed throughout the entire life of the investment, with an average term of 1.25 years, which poses a higher exposure to the flotations of the market. During the observed period, 32% of the bonus certificates breached their barriers and replicated the performance of their underlyings at maturity, contributing to a lower average of just 0.37% per annum.
Underlyings within the capital-at-risk sample
Single shares dominate the Italian market with a clear preference for domestic stocks.
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The average term predefined at inception is 2.5 years, with more than half of products distributed equally between one-year terms and three-year terms, while the actual term of the certificates averaged 1.4 year. Only 11% of the certificates offer predefined term longer than five years. The strong presence of autocallable certificates (61% of the capital-at-risk sample) shifts the actual term from medium term to short term, as seen above. Originally, only 39% of the capital-at-risk products had term of a year or less, but actually 79% of the products terminated on or before their first year.
Moreover, very short-term products of a year or less will have experienced strong annualised returns (7.6 % on average for the less than one-year term), as this category mainly comprises products that matured early with a positive return.
Jan-14Mar-14May-14Jul-14Sep-14Nov-14Jan-15Mar-15May-15Jul-15Sep-15Nov-15Jan-16Mar-16May-16Jul-16Sep-16Nov-16Jan-17Mar-17May-17Jul-17Sep-17Nov-17Jan-18Mar-18May-18Jul-18Sep-18Nov-18Jan-19Mar-19May-19Jul-19Sep-19Nov-19Jan-20Mar-20May-20
Average
Average
There is present a positive correlation between the performance of equity markets in Italy and the performance of structured products. As seen above, structured products tend to absorb the high fluctuations of the market, keeping more stable returns compared to their underlyings. The structures usually suggest a limited growth in case of rising markets and unlimited fall in bearish markets, but the numbers show that during a steep fall of equities, structured products manage to outperform by capturing bullish trends. In addition, some products are build to secure yield even during periods of market downfalls, which helps avoiding the uncertainties in sideways moving markets.
With performance targets and possible scenarios known in advance, autocallables fared well in sideways markets, delivering an average of 6.43% per annum.
Some 53% of the early redemption events occurred on the first observation data.
More than 74% of all autocallables recorded an average annualised return of over four percent.
Autocallables accounted for 62% of all capital-at-risk maturities since 2017 – the most for any other single payoff - generating average returns of 6.25% per annum, compared to an overall average of capital-atrisk products for this period of four percent per annum. Over the entire observed period, just 3.8% of all autocallables delivered less than the initial capital at maturity. The negatively performing products returned on average a loss of 20% per annum. Meanwhile, positively performing products returned on average 7.55% per annum.
More than 16% of the autocallables delivered an annual return higher than 10%, returning between 10.1% and 149.8% per annum to investors, with an average of 15.43%.
More than half of all autocall products matured on the first observation date, returning on average 7.37% per annum. A full 12% reached organic maturity, returning on average a loss of 2.78% per annum.
Originally, autocallables have a long enough term (average of 3.3 years) to allow the underlying to absorb possible unfavourable market cycles from the start and to give them time to benefit from a possible subsequent rise in the financial markets. As seen in the tables, the market downfalls in 2016, 2018 and 2020 offered fewer preconditions for products to be called, in contrast with the rest of the observed period, which saw an important number of early redemptions contributing to the good performance of the market.
Italian autocall products knock out usually on a monthly, quarterly, semi-annual or annual basis with few products offering secondary conditions for autocall event on the first observation date or more frequent observations. 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.
It was a strong start to the year for the Italian structured products market with forecasts to perform even better. It reached its highest performance point in January (8.8% average) since markets stabilised after the banking crisis in 2016. In fact, for the first two months, issuance of subscription-based products hit its highest level in recent years collecting €2.9 bn. As issuance continued to rise in March, the crisis affected the volumes and by the end of the first half, volumes were down 32%. Similarly, the performance of the products reaching the end of their term, scored an average of eight percent in January and February.
In the first two months of this year, structured products performed at their maximum return, as the FTSE MIB reached its highest level since the beginning of 2019 in February. As the Covid-19 pandemic unfolded with Italy being the most affected country, by mid-March, the benchmark fell by more than 10 points. However, the performance of the structured products didn’t catch up with the critical levels until the beginning of May, when performances hit -12.9% pa monthly average and kept a positive average return until mid-April. The severity of the crisis reflected the returns of structured products as well, but even at their lowest level, they managed to outperform the benchmark by one point. As the economic system started to recuperate from the hit and the FTSE MIB headed for a positive performance, structured products followed at a slower pace.
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