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Structured products: Comparing defensive strategies

Structured products: Comparing defensive strategies

Some structured products offer the potential to make gains in all but the most extreme market conditions, but advisers need to know how to compare them properly, writes Ian Lowes (pictured).

Structured products with defensive strategies that give investors the potential to achieve gains in all but the most negative market conditions have become more common recently. Walker Crips Defensive Dual Index Plan is now in its eighth issue and Incapital Europe’s Dual Index Kick Out Plan - Defensive Series is in its fourth evolution.

Both these products are maximum six-year kick-out plans linked to the FTSE 100 and S&P 500 that, as their name suggests, offer the potential to achieve gains even in falling markets. However, there are some significant differences between the two plans.


The Walker Crips plan offers a potential return of 10% for each year held, whereas the coupon for the Incapital plan is slightly lower, at 9%, but that does not make one better than the other.


As ever, returns are subject to the continued solvency of the respective counterparties. Incapital’s plan utilises Barclays Bank, and Walker Crips has utilised Santander UK.

There is arguably little to choose between the two counterparties. Both are rated as A+ by Standard & Poor’s, although S&P has a ‘stable’ outlook on Barclays’ rating and ‘negative’ for Santander UK. The opinion of Fitch is that Santander UK is slightly weaker than Barclays, however Moody’s ratings indicate the opposite, holding both institutions on ‘negative’.

All the ratings agencies indicate they believe both institutions have a strong capacity to meet their financial commitments.

Initial index level

The Incapital plan strikes on 30 March and the Walker Crips plan on 27 April. Which of these will be more advantageous cannot be known.

Early maturity and kick-out criteria

The Incapital plan cannot mature until at least the second anniversary but will do so even if both indices have fallen by up to 5%. If one or both indices are down by more than 5%, the plan continues until the third anniversary, when it will mature, paying a gain of 27% (3 x 9%) provided both indices are not lower by more than 10%.

For each year it does not mature, the maturity reference levels are reduced by a further 5%, the end result being if the plan runs until the sixth anniversary it will still produce a gain if both indices are down but by no more than 25%.

In contrast, at first glance, the Walker Crips plan looks similar to a standard auto call in that it will mature with a gain on the first anniversary that both the FTSE 100 and S&P 500 indices close at, or above, their corresponding initial levels. It is only in the event that the plan runs for the full six years that the defensive feature becomes relevant. If, on every anniversary, one or both indices are below their initial levels, then on the final anniversary the plan will still produce a gain, provided both indices are at least 50% of their starting levels, in which case the gain will be 60% (six years x 10% coupon).

Capital at risk barrier observation

The Walker Crips plan will give rise to a loss if both indices are down on every anniversary, and one or both are more than 50% lower at the end of the term. Any loss to capital is dictated by the worst performing index.

Under the Incapital plan, the barrier is observed at close of business on each day during the investment term. If either index closes more than 50% below its initial level during the term and both fail to recover to the relevant point required to trigger maturity with a gain (eg, 80% of the initial index levels on the fifth anniversary), then a loss in line with the worst performing index will arise at the end of the term.

Weighing up

It is impossible to say which of these investments is better, as only time will tell. Setting aside the fact that the Incapital plan cannot mature until the second anniversary, the terms are such that in moderately adverse market conditions it has greater potential to mature with a gain in the early years than the Walker Crips plan. However, the latter has greater potential to produce a gain in all but the most extreme market conditions.

Ian Lowes is managing director of Lowes Financial Management and

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