• Structured Products allow investors to give up some of the upside potential of an equity index for significant downside protection
• Our Atlantic House Defined Returns fund forecasts a positive return of 16% in 3 years time if markets are down 10%², demonstrating the power of these products in a falling or flat market
• Not once in 40 years, has the S&P500 or FTSE100 fallen 35% or more and not recovered within 6 years, making a capital loss on Structured Products very unlikely¹

Structured Products are a fascinating financial instrument we use to optimise the equity risk-reward profile in portfolios. They track the performance of an underlying asset, typically an index, commodity or currency, but then have varying terms overlaying it. These conditions could involve an element of capital protection where your initial capital is protected by the underlying bank that has sold the structured product, or a participation rate, where you participate in maybe only 60% of the upside and downside. Essentially, you give up some upside to protect the downside.

Example ‘Defined Returns’ Strategy

At Bowmore we typically use a Defined Returns strategy. The below table illustrates how this works. We have a term of 6 years autocallable annually, the two benchmark indices are the FTSE100 & S&P500 and the defined return is 8.35%. What does this mean? At the anniversary of the structured product each year the index levels (FTSE100 and S&P500) are compared to their initial level when the product was taken out. If both indices are at or above the autocall trigger level, the product will automatically end and the investor will get their initial capital back + 8.35% per year that it was running.

Source: Downing Active Defined Returns Fund

So at the end of year 1, let’s say the FTSE has done +2% and the S&P has done +6%, they’re both above 100% of the initial level, the product will end and you will get back +8.35%. In this scenario, where equity markets are positive but not exceptional, the structured product provides significant outperformance. The return is capped (defined) at 8.35% though, so if both indices do +10% then you’re missing out on that performance differential but this is the price to pay for the protection. Now what happens if one of the indices is below 100% of the initial level, the product just carries on and doesn’t pay out. At the end of year 2, however, both indices just need to be above 95% of their initial level. So if both indices fell 1% in year 1 (and so didn’t kick out) and then both fell 1% in year 2, they’re roughly at 98% of the initial value and so would automatically end. The investor makes a return of +16.7% whilst the markets have fallen 2%.

If the autocall doesn’t trigger, it rolls on to the next year and the trigger level gets lower and lower. At the end of the product is a defensive barrier. One of the indices has to have fallen by more than 35% and then never recovered in 6 years for an investor to make a capital loss, at this point it is 1 for 1 with the market. Not once in the last 40 years, has this ever happened in the S&P500 or the FTSE100 with a 65% barrier. For the S&P500, these products would have only paid out in year 6, 0.24% of the time.¹

The following chart needs the usual caveat that it is just an estimate and not a reliable indicator of future returns, however, it does illustrate the potential of a defined returns strategy. These are the forecasts for our Atlantic House Defined Returns fund. If equity markets are 30% up in 3 years’ time, the fund will naturally underperform (capped upside) and only deliver 28%. However, the real value is at the negative end of the scale. If equity markets are down 10% in 3 years’ time, the fund should be up 16%. That’s because the target level is normally at 90% in 3 years’ time, so a lot of the structured products would have kicked out and pay 3 years’ worth of coupons.

Source: Atlantic House Defined Returns

Liquidity

Liquidity is always a factor to consider with instruments like these – they are highly customised which means there isn’t usually a secondary market for them. Instead, for Structured Products the bank that issued them will buy the product back itself and cancel the units. The risk is the bank does not have sufficient capital in its treasury department, but today’s regulation means that banks are capitalised on their balance sheet to ensure they can buy back assets if required. We also make sure that the funds we use only invest in instruments linked to highly-developed, large-cap, liquid markets like the FTSE100 and S&P500 to further ensure good pricing and liquidity.

Bowmore portfolios

We invest in two defined return funds across portfolios: Atlantic House Defined Returns, and Fortem Progressive Growth Fund. The former targets 7-8% per annum, whilst the latter is slightly more defensive and targets 6-7% per annum, and they’re doing what they say on the tin. The Atlantic House fund has delivered 7.1% per annum over the last decade, whilst delivering less than half the volatility (risk) of the S&P500. With the current tariff uncertainty and US economic growth starting to slow down, these instruments provide an excellent tool to achieve attractive returns if equity markets have a more muted year.

Source: LSEG DataStream, data as at 12/06/2025

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.

Sources:

¹ Downing Active Defined Returns Fund

²Atlantic House Defined Returns Fund