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New Gilliat structured product goes ‘head to head’ with trackers

by Robert St George on Dec 02, 2013 at 13:49

New Gilliat structured product goes ‘head to head’ with trackers

A new structured product from Gilliat, an arm of Arbuthnot, will offer geared exposure to equity indices in a way that challenges other trackers, the firm has said.

Gilliat’s International Growth Portfolio will have a six-year term and offer investors access to a choice of three markets: the FTSE 100, the EURO STOXX 50, and the Russell 2000.

If the underlying index rises by up to 25% through the product’s life, the investor will receive a 125% return on capital. For index gains between 25% and 42%, investors will receive the 125% of capital plus five times the percentage rise above 25% for the FTSE 100, 4.85 times for the EURO STOXX 50, and 2.9 times for the Russell 2000.

For rises that are above 42%, the return will be capped at 210% for the FTSE 100, 207.45% for the EURO STOXX 50, and 174.3% for the Russell 2000.

If the index falls through the six years, the investor will receive 1.25 times the end level of the index as a percentage of the start level. This means the index would have to drop by more than 20% for investors not to reclaim their capital. The product would only underperform the market if the index rose by more than the maximum cap.

‘With the International Growth Portfolio we are showing that structured products can go head to head with tracker funds and, in all but a strongly rising bull market, offer better performance,’ commented Adrian Neave, Gilliat’s managing director.

‘We believe this product will make advisers and investors sit up and take notice of structured products as providing mainstream index-based investments.’

The product’s counter-party is Morgan Stanley, and its minimum investment is £3,000.

6 comments so far. Why not have your say?

n s

Dec 02, 2013 at 17:32

This article is misleading, it does not speak about the fact that trackers pay dividends, and this does not. Also, this has one more risk.. "counterparty risk" that the trackers do not have. This is because these products use derivatives rather than equities.

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Chris Taylor, MD, The Investment Bridge

Dec 05, 2013 at 20:15

ns : do you think you know what you are talking about? if you don't it is, perhaps, you that is misleading people? Case in point, please explain the relevance of your point about counterparties and derivatives?

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n s

Dec 06, 2013 at 12:30

The article speaks about the structured product and tries to compare it with trackers. Only positives of the structured products are explained in detail.

Trackers pay dividend, FTSE100 is yielding around 3%+, So 18-20% of dividends if one invested with the tracker is not available when one invest in the structured product. That needs to be mentioned to allow people to make a judgement as to whether the product is good or bad.

In the case of this structured product, one may lose all money(like with Lehman brothers), if Morgan stanley goes bust. That is an additional risk in addition to the fact that FTSE/index could fall and one could lose money. Most trackers have invested in the real shares that make up the index, and so do not have counterparty risk. Some trackers do use synthetic means and are subject to the same counter party risks.

I have been investing in structured products for years as a retail investor, and continue to do so. It will be based on my judgement of value of that product at that time compared to others in the market.

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Chris Taylor, MD, The Investment Bridge

Dec 06, 2013 at 13:42

Thanks ns. It's good to know that you invest in SPs, and successfully so I hope/trust? Your comment sounded overtly negative, including reference to dividends, etc, hence my questions.

Your point regarding dividends is, of course, valid. SP's usually invest in price return indices only. Where the index is in respect of a market or asset that usually offers dividends, the SP needs to offer returns, or a risk/return profile that is sufficiently good to compensate for this.

Geared returns, on the upside, including optimised returns on the downside, that can turn range bound markets into solid minimum returns, of 25%, in this case, and accelerate mid-range returns, to higher levels, and that mean no losses are suffered unless the market falls by more than 20%, clearly one way of doing this.

On a pure 'market' risk/return basis the Gilliat structure clearly does challenge active and passive funds, with this formula-driven approach to investing.

The flip side of repositioning the market risk/return profile is counterparty exposure. But counterparty exposure can be seen as a benefit, just as much, as a risk, if looked at objectively. I won't go into full detail here - but some work is being done currently on this subject, that will be released shortly (next week or two).

You have not elaborated on your point about derivatives - which you have originally positioned as a specific negative? Could you elaborate?

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n s

Dec 06, 2013 at 15:39


In my message I said "This is because these products use derivatives rather than equities." The derivatives is the cause of the counterparty risk. If real assets are involved, there is no counterparty risk.

I do not take issue with the product. I have no view about the product. If this article was on Gilliat's website, that is perfectly understandable. But Citywire journalists are supposed to give a detailed information about the product, and its pros and cons. It seems like an advertisement rather than an article. As you yourself have agreed, dividend has been conveniently left out from the article.

The article title says about "head to head with trackers", so I would expect the article to compare it head to head and be neutral and allow readers to decide. It is very easy for novice investors to miss out the dividend part of the story, which is significant. It would have been nice if the writer spoke about when the tracker will be better than the product and vice versa. An example:If FTSE grows by 24%, I will get back a gain of 25% on the product. But if I had invested in a tracker, I would get a gain of 24%+18-20% dividends. But in many other cases, the product may do better than FTSE tracker+dividends.

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Dec 07, 2013 at 11:34

NS. I am afraid that you have presented a seres of seriously flawed arguments. Firstly, the tracker reference is a quote from the company themselves, hence the quotation marks. To criticise the publication for taking a quote from the firm without "health" warnings is the same as criticising a tracker provider for stating the "aim is to track the index" and not mention tracking error or, as you have failed to do, mention the fees.

Next, the issue of derivatives is complete red herring. A derivative doesn't add counterparty risk to a contractual product like this. The investor is purchasing a bond, the bond pays out regardless of what assets the issuer decides to purchase. The ONLY counterparty risk is of the bond issuer defaulting, that has about as much to do with derivatives as a long only fund.

You also decided to focus on the FTSE product, was that because the other two indices have considerably less dividend yield?

If you want to criticise the article, do so, but don't dress it up as anything other than a criticism of structured products.

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