Courtiers: how we mitigate volatility

Caroline Shaw, investment manager at Courtiers, on why handling volatility is such a priority before making product choices 

Have you made any gains from your structured product holdings?

We’ve had one of our structured notes auto-call and deliver a lovely return.

It’s a Morgan Stanley note that delivered an annual return of 11.35%, based on the FTSE 100, with a strike level of 5,895. We bought this two years ago.

There was no auto-call in the first year, so the second year was the first opportunity for it to auto-call. We made more than 22% on that, which is a very attractive return given the FTSE 100 has been mostly flat over this time.

However, if the FTSE 100 fell down during this period, you got killed on the mark to market. So in 2011 in August, when the market tanked about 10%, the note went down too. So we took a big hit on the mark to market in August.

As a result, I haven’t rolled this into a new product, because our volatility levels would look really high. Our clients want smoother returns, and protection.

Furthermore, as volatility is so low, these notes are now not priced as competitively as they were a couple of years ago.

So, we are looking to pick up more products in the secondary market if and when the FTSE falls again, rather than opting for primary issuance.

Why is volatility such an issue?