More than half of planners intend to use capital protected products in the year ahead – but is it the right strategy for clients? Kristen Paech and Simon Hoyle report.

Cashed-up but cautious clients are looking to invest in growth assets this year and are showing heightened demand for capital protected solutions. While markets were rising, investors saw little need to protect their capital from a fall in markets, but with the pendulum swinging in the opposite direction, many have had a change of heart.

New research, the Macquarie/Investment Trends Alternative Investments: Planner Report, reveals 59 per cent of planners intend to use structured products this year.

“It’s really the interplay between the fact that a lot of investors see assets as undervalued in the current environment and they tend to disagree with the view that the stockmarket has a lot further to fall, but they don’t strongly disagree with that idea,” says Mark Johnston, principal of Investment Trends.

“So a number of investors are looking to hedge their bets.”

Johnston says planners reported that many clients are shell-shocked and are cautious about making new investments in the current volatile market.

“What we saw was [that] there is this pool of money that’s built up because a lot of clients have retreated to the sidelines and are reluctant to invest until things start to calm down,” he says.

“Capital protected products are a way to get some exposure to the upside and limit their downside, given the ongoing volatility.”

Matthew Drennan, director of investments for Zurich, says diversification and a focus on risks and returns will stand investors in good stead in years ahead.

However, he warns planners and investors to be wary of certain “guaranteed” products. If your clients are “nervous, and they are looking to flock to certain guaranteed products” then it’s important to properly assess the structure of the product, and not assume it’s a suitable solution to clients’ desire for security simply because of the guarantee, he says.

“I do not think enough analysis was put in by some people as to what they were actually [buying],” Drennan adds. For example, under some guarantee structures, if a series of particular events occurred then investors would, indeed, get their capital back, but not for a period of perhaps three or four years.

That means capital, while protected, was locked up for longer than investors and some planners wanted, or believed would be the case.

And that could mean they do not have the flexibility to invest in asset classes and products that may offer a better rate of return going forward.

“I think guaranteed products have to be analysed very carefully by planners, to see if they’re appropriate,” Drennan says. The Macquarie/Investment Trends survey of 650 financial advisers found that $58 billion in excess cash had been built up over the past year across the planning industry’s client base.

When asked what would trigger clients to move back to growth assets, 23 per cent of planners said “economic stability/recovery” and a further 23 per cent said a “rise in confidence”.

Only 4 per cent said this was already happening, and just 8 per cent believed it would happen on their own advice.

One fifth of planners thought a stockmarket recovery would be the trigger, while 19 per cent said “reduction in volatility” and 11 per cent said “positive media coverage”.

“This reflects the classic investment conundrum where money flows into investments following good performance when prices are high, but dries up following poor performance when prices are lower, often resulting in clients missing out on the full extent of the upswing,” Johnston says.

“To an extent it’s a perennial problem. Historically there has always been this issue that investors underperform the asset classes they’re in because of the timing of flows. Because planners are dealing with clients day-to-day, they’re aware of this issue.”

Kurt Jeston, division director in Macquarie Securities Group, says ongoing market volatility means planners are looking for investment solutions that allow them to “weather the storm during these more turbulent times”.

“In particular, they are looking to offer their clients exposure to investments offering higher growth potential; however, they have also highlighted their shift in appetite towards more transparent and simple structures,” he says.

Thirty five per cent of planners intend to use more direct equities over the coming year, while only seven per cent are planning to decrease their use. Almost 30 per cent plan to increase their use of capital protected products versus only nine per cent planning a decrease.

“We’re working with a number of planners who are keen to give their clients access to equities following recent market falls, but are concerned about ongoing volatility,” Jeston says.

“So we’re developing investment solutions in conjunction with these advisers that provide this exposure for their clients but with features that help to mitigate the risks in the current market.”

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