|Structured Investment Products
Structured Products are providing investors with defined investment parameters during incredibly uncertain economic times. Obviously the uncertainty with the Global Economy has led to investment market volatility which now seems to be disconnected from economic reality.
The swings in the indices, along with the interest rate position, has produced a challenge for all providers of structures.
Our readers/investors will have recently seen early closure of many product issues. This has mainly been caused by high demand and the inability to obtain the same terms/inventory as initially offered for the excess to the initial capacity.
It is often (mostly) impossible to predict the demand from investors, regardless of how attractive the contract terms are… Under more normal circumstances, purchasing further inventory to cope with the demand from investors is possible but as the component parts of pricing that impact how the ‘Contract Terms’ are constructed change so rapidly, an issuer/provider is presently finding it impossible to match demand with supply (in the simplest terms possible!).
A simple explanation of how early closure develops
In recent days and weeks the ‘implied volatility’ has reduced significantly, with rates cut and ultimately pricing inputs for plans subdued. Issuers have taken advantage of the odd day of volatility and bought a set amount of capacity – but when demand outstrips supply the recent experience of closure develops – especially if investors identify strength in a product offering.
If a provider could understand the ‘demand’ position at outset the supply terms would not be interrupted but this is realistically impossible and we are not operating in normal times.
As a retail advisory business, it is virtually impossible for our business to gauge demand for products issued, although we can ‘guess’ based upon the contract terms, if plans will be successful or not… It is therefore unrealistic for product providers to accurately secure the supply to the demand needs.
It is therefore imperative that if an investor wishes to invest in a plan – as the contract terms are attractive – action should be taken promptly, otherwise demand may outstrip supply. Many will know from recent experience that even when urgent action is taken, initial terms are not guaranteed to be secured – based upon the above impacts.
We assure our investment clients that we work to action applications promptly and do all we can to secure investment positions. We are working to develop a reservation allocation with all providers (although this only applies to the immediate/prompt transfer of investment money with the completed application form).
We trust this simple overview provides some idea of the challenges of the present market and why early action is essential.
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As always, don’t forget the risks.
If you have any questions or require advice, get in touch.
Richard and the Best Price FS Team