Market snapshot

The launch of Investec’s twenty-fourth series of its regular product suite keeps it at the top of the UK product issuance table, with a near 21% market share. In the US, Barclays Bank maintained its position as the leading producer of reverse convertible notes. The bank is also one of the most prolific issuers in the UK, providing 16% of all products in January (these figures only represent the products issued and marketed by Barclays. There are probably more products actually issued by Barclays in the UK but they are marketed by smaller providers).

In the US, accelerated growth and reverse convertible products swapped places as the most popular: reverse convertibles still make up the largest product type by number issued, accounting for over 35% of all products on structurededge.com. The average notional per product for reverse convertibles is roughly $5.7 million, while the average notional across all product types is roughly $8.4 million. The product type with the largest notional is principal protected, which has an average notional of more than $26.6 million.

In the UK, capital-at-risk kickout products are still top of the table. Compared with the rest of the products in the UK – most of which are FTSE-linked – this product type has the largest variety of underlyings. The FTSE 100 still dominates but there are also products linked to the performance of commodities, emerging markets indexes, alternative equity indexes, stocks and funds. Included in this category are single-asset and multi-asset kickouts, the majority of which have capital repayment based on the worst performing assets.

Some of the products on the market are linked to as many as 10 individual underlyings. Unlike most UK structured products, kickouts cannot be broken down into a series of income streams and options. The pricing and risk of these products is reasonably complex and without analysis it is difficult to assess the value and expected returns of one product compared with another.

Figure 1 shows the change in percentage issuance of four product types: accelerated growth, review, reverse convertible and principal protected growth. Sales of reverse convertibles as a percentage of total sales have declined from December 2010 to January 2011. Sales of the other three product types have increased over the same period.

Research methodology

Included in each research report on the following pages are scores given out of 10 for transparency, value and return, as well as a measure of the product’s level of risk, known as the riskmap rating.

The transparency score takes into consideration the product’s payout profile. The simpler the product, the better it scores. The design of the product – such as how capital return and income are calculated, whether there are any barriers, averaging, cliquet or kickout features – are taken into account.

To reach the value score we estimate the fair value of the derivative assets at the time of purchase using implied market data calculated by us from information supplied by official exchange data sources. We may also use additional market sources for information, particularly for more complex products. Prices are calculated using FVC’s proprietary models and are done independently of the product provider or any other market source.

The return score looks at what the product is likely to pay out. It assesses the probabilities of various outcomes of product return and calculates a score based on how good the average returns are expected to be. We assume reasonable growth rates and volatilities of return based on the previous history of the underlying asset. These assumptions for the asset are then fed through the product payout to arrive at the outcomes for the product return. Overall scores are calculated and adjusted for tax treatment for UK products.

Each product is allocated a riskmap rating, which is designed to express the product’s risk level. The riskmap rating is a number between zero and 10, with zero being the least risky and equivalent to the level of risk found on a deposit account and 10 being the riskiest and equivalent to the level of risk found holding single stocks and high-risk funds. The riskmap rating is a useful investment selection tool in that it helps advisers decide which products are suitable given a known target level of risk.

Further statistics shown include simulated Sharpe ratios, equivalent initial portfolio of conventional assets, upside and downside measures which represent conditional upside and downside expected returns, and banking sensitivities of delta, rho and vega (sensitivity to underlying asset, interest rate and volatility, respectively).

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