When structured products are sold before their maturity dates, it can lead to some seemingly odd results for investors, as one adviser discovered, writes Ian Lowes (pictured).

Recently, adviser David Glasgow, of Belfast-based DG Financial Planning, told me he felt Barclays had not treated one of his customers fairly in reducing the surrender value of a structured product just prior to maturity.

Glasgow said Barclays only priced its plans twice a month, on the 10th and last working day, making it difficult for advisers to get an accurate reflection of how a product is performing prior to maturity.

The question

The query brought by Glasgow was this: ‘How can [Barclays] move from a value of £18,487 when the FTSE 100 was [5,572.30] in December 2011 to a final encashment value of £17,948 on 30 March 2012 when the FTSE-100 was higher [5,768.5]?’

He said he was always mindful to inform clients that structured products are intended to be held until maturity, but added: ‘We recognise some investors need to exit early and others may do so because it appears to make investment sense. In this particular case the investor had exited a five-year investment prior to maturity as it had become apparent it was highly unlikely to produce a positive return’.

The original investment, in the Barclays Defined Returns Plan – Issue N8 (5 year), was made in April 2007 when the FTSE 100 index was 6,440.60. The client invested £18,022, and the investment was due to mature in April 2012. The value on 31 December 2011, when the FTSE 100 was 5,572.30, was £18,487. On 29 February 2012, when the FTSE 100 was at 5,871.50, the value was £18,537.

Yet when the investment was surrendered at the end of March 2012, when the FTSE 100 was at 5,768.50, the value was only £17,948.

Glasgow was concerned that although the FTSE 100 had fallen less than 2% from February, Barclays had reduced the value of the investment by around 3.2%. He raised the issue with Barclays, which rejected his complaint.

A Barclays spokeswoman said: ‘As well as the level of the FTSE 100, several other factors affect the market price of an investment during its term, including interest rates and market volatility.’

The explanation

This case can be explained as follows. The investment was a capital-protected structured product, which would have produced a gain of 37.5% (maturity value £24,780) provided the FTSE 100 was higher at the end of the term than it had been at the beginning.

The investment was taken out in the hope, and expectation, that the FTSE 100 would rise over the term. However, if the FTSE 100 did not rise the investment would return all of the original capital (£18,022), unless Barclays became insolvent.

The higher surrender values quoted to Glasgow in December 2011 and February 2012 reflected a small chance that the FTSE 100 could rise above the all-important 6,440.60 level by 19 April 2012.

The importance of timeliness

The FTSE 100 did rise strongly from the March 2009 low of 3,460.70 to 5,572.30 by the end of December 2011 and 5,899.90 by 14 February 2012. So the idea it might reach 6,440.60 by April 2012 was not beyond the realm of possibility. The December and February surrender values at 2.5% to 3% above par reflected the small probability that the investment might mature with a 37.5% gain.

However, as the time to maturity ran down and the market recovery ran out of steam, it became apparent the plan would return only the original capital at maturity.

Although the logic of surrendering so close to maturity is questionable, the ultimate surrender value of £17,948, being 0.41% less than the plan would have produced four weeks later, seems to represent appropriate value.

Given this explanation, the pricing in this example looks less like a smoke screen and more like an appropriate payout.

Ian Lowes is managing director of Lowes Financial Management and structuredproductreview.com