Reyker Securities is marketing its first commodity-linked product to UK retail investors as a response to demand from clients who have not seen commodity-backed products in the UK retail market for nearly two years.
The Commodities Supertracker Plan 50 is tied to an unevenly balanced basket consisting of Brent crude oil (25%), WTI crude oil (25%), copper (10%), zinc (10%), nickel (10%), gold (10%) and the S&P GSCI Agriculture Index (10%). The plan is fully protected and will pay 135% participation in any growth registered in the basket at maturity. To counteract the high volatility distinctive to this asset class, the final value of the basket is calculated by taking the average of 13 readings over the final 12 months of the investment.
The plan comes as something of a surprise, as commodity-backed products have been out of favour over the past two years, a result of the end of the famed “commodity super-cycle” that fuelled a decade-long bonanza in global financial markets. Barclays estimates that since 2004 more than $440bn has been poured into index funds and exchange-traded funds (ETFs) tracking broad commodity indices.
“From a portfolio management perspective, there is still a case for investors to invest in commodities to broaden diversification,” Ryan Lopez, part of the markets and investments team at Reyker, told SRP. “Many investors also use this asset class as a way to hedge inflation.”
However, according to Robbie Morrison, investment analyst at Seeking Alpha, correlations between commodities and other risky assets are currently very high, undermining the case for portfolio diversification.
Rise and fall
SRP data shows that the popularity of commodity-linked structured products has evolved from the heady days of 2007 and 2008, during which yearly sales amounted to £447m and £364m respectively, to the less profitable year of 2012, which registered sales of £179m. In 2013, commodity-linked products disappeared from the retail space altogether.
However, structured products continue to offer exposure to difficult-to-access assets as opposed to directly investing in an underlying. “Accessing commodities directly is difficult and costly for most private investors and their volatility mean they often need to be managed very actively,” said Lopez. “A structured product linked to commodities provides an alternative way for investors to gain exposure in this asset class.”
On Thursday, the day the plan struck, a number of banks including Citigroup, Deutsche Bank and Goldman Sachs warned of substantial declines across a number of key commodities as global supplies steadily increase. Copper, gold and Brent crude oil, which together form 45% of the plan’s basket, are among the commodities forecast to decline over the next five years.
Despite the sombre predictions, James Chu, head of markets and investments at Reyker, told SRP that the plan was launched due to investor demand for such a strategy. Referring to the benefits of the plan, Sam Eade, who works alongside Chu and Lopez, told SRP that despite the end of the super-cycle, the plan made sense.
“Our product is capital-protected (subject to counterparty risk with the issuer, Goldman Sachs) if it is held till maturity,” said Eade. “Furthermore, given the volatile nature regarding the performance of commodities, we monitor the plan throughout the lifetime of the investment and inform advisers whether it is time to take profit, or inform them that the market environment has changed, such that it is unlikely that the product will generate a positive return, and investors may be better to sell early and reinvest in something else.”
According to SRP data, Reyker has marketed 32 structured plans in the past two years, all of which are still live.
Reyker is also marketing to UK retail investors the Aviation Kick Out Plan 51, the first product featuring aviation-only shares sold in the UK market.
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