Several UK providers will miss out on rollover opportunities after a number of knockout products set to mature early this week failed to beat their strike levels.
Walker Crips (Annual Growth Plan Kickout Issue 5) and Gilliat (UK Annual Kickout Plan Sept 2010), which had their strike level on the FTSE100 on the same date, promised to mature early last Monday if the FTSE100 was above its initial level of 5954. The index, however, could not recover after its recent fall and finished on 5129.6. Other knockouts set to mature this week will have the same fate, including Legal & General's FTSE Early Bonus Plan 5 (5555), Morgan Stanley's FTSE Bonus Growth Plan 2 (5555), Woolwich's Accelerated Growth Plan 7 (5407.9) and Premier Asset Management's Protected Growth Plan 33 (5877), which has already missed two previous knockout dates.
"Obviously this will affect sales because there will not be any rollover money," Adrian Neave, MD at Gilliat Financial Solutions told SRP. "We tend to do bespoke for rollovers so we are not expecting any rollover money this month. Things that were priced a year ago at around a level of 5500 have very limited chances. There may be some defensive knockouts that will mature early but certainly it will be limited. We haven't had any knockouts since early September."
John Gracey, director of structured products at Merchant Capital, said the lack of rollover money will not affect product development as these products are designed for volatile times with sideways markets: "Knockouts offer a better rate than cash products or deposits, but they are not meant to kick out at the first opportunity," he said. "They play on market uncertainty and that is why they are popular among advisers. We closed one last week and did very well. There is demand out there for knockouts."
According to James Chu, MD at Incapital, knockouts will not lose traction because even in falling markets they allow product structurers to introduce defensive features or increase the frequency of the knockout condition: "The way they are designed includes the possibility of the underlying recovering to its initial level and paying a good return during the term," he said. "In our experience, knockouts appeal to new money as well as rollover money, whether they mature early or not."
The lack of rollover money, added Neave, will not have an effect on the issuance of knockouts, as with markets falling the coupons that are offered are higher and more attractive to advisors and investors: "At the moment if you're doing FTSE-only, strikes at around 5100 are more attractive than 12 months ago when the strike was at 5500," he said. "There may be variations, but we will mostly see 50% downside barriers because that still gives more value to the upside than, let's say, a 60% point to point or a European barrier. With the FTSE roundabout at around 5000 and the S&P roundabout at 11200, providers and investors will see it as quite an interesting level to get into one of these structures."
SRP data shows the 2011 issuance of knockout products in the UK so far has increased by around 23% compared to the same period in 2010.