UK AUTOCALL INDEX vs FTSE ETF

At www.cubeinvesting.com we have been calculating an index of FTSE linked Autocalls using the published prices of all qualifying products since May 2007. The performance of this index illustrates the returns that investors have received, and the risks that they have faced from this type of asset. We have compared this index against the total return performance of a FTSE ETF.

The performance of this index, and the comparison against the ETF will affirm what regular investors in this sort of structured products already know, and may surprise investors that are not familiar with these investments. The performance of the index supports the proposition that structured products are an attractive choice for investors that think the returns from equity markets will be sub-par over the next few years with no significant downside risk. The index also highlights the risks faced to investors if we get another financial meltdown.

QUALIFYING PRODUCTS

To qualify products have to meet the following criteria

• Linked to the FTSE on its own
• Autocall, with flat or declining triggers
• Capital at risk with barriers less than 60%. Barriers can be American or European
• The issuer publishes a daily price
• We have to have picked up the product in our system

We are not claiming that the index is comprehensive, we are looking for more data for older products, and will back-fill the index as we get more information, but with the data we have, I think that we can draw some interesting observations and conclusions that may confound the skeptics and naysayers.

PERFORMANCE ANALYSIS

OBSERVATIONS

Given the performance of the FTSE over the last few years we would expect the ETF return to be higher than the Autocall Index return, and this is what we can see has happened.

For all of the periods over which we measure performance the Sharpe of the Autocall Index is better than or equal to the Sharpe of the FTSE ETF

For the shorter time periods the volatility of the Autocall Index has been around half the volatility of the ETF. Downside deviation is lower, Sortino Ratio is higher, max drawdown and daily drawdown are lower.

The longer observation period includes the 2008/2009 crisis. Over this term the Autocall index has performed better than the ETF and volatility is similar. The key to understanding why this period is so different, is the performance of the Autocall Index from May 2008 to Feb 2009. For various reasons (volatility spike, CDS expansion, funding spreads expanded) over this period the Autocall Index performance was worse that the ETF and volatility was significantly higher. The subsequent recovery was even more dramatic. It tool until 2011 for the ETF to get back to pre-crisis levels by which time the Autocall Index was up 20%

CONCLUSIONS

An analysis of the index returns demonstrates that Autocalls and similar structured products are an investment that offer the possibility of steady returns under most market conditions. The risk investors face is that in extreme conditions the mark-to-market value of these investments can fall significantly. On the other hand the opportunity cost is that returns may not be as good as the underlying equity market if the bull market continues.

USING THE INDEX

The UK Autocall Index we calculate can be used to help the asset allocation process and in portfolio optimization tools. The index is a benchmark for portfolios of structured products and can be used as an indication of returns that investors would have received. Please contact Cube Investing for more details.