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CUBE Investing provides risk-rating and scenario analysis of UK retail structured products  

The future for structured products is unbundled securities sold via platforms, completely transparent and risk rated and so able to be better compared with other investments in the market, CUBE Investing director David Stuff tells ABR editor Rob Kingsbury

CUBE Investing is a new company, launched in May 2014, led by David Stuff, who has a 14+ year pedigree in structured products including time at Barclays, JP Morgan, RBS, Meteor Assert Management and Hartmann Capital. I had the opportunity to talk with him about CUBE and, in particular, the research element to the website that he is putting together. This is offering risk ratings on structured products – not just for CUBE products but for all retail products available to advisers in the market.

Stuff was instrumental in formulating the idea to package structured products to enable them to be more easily sold to retail investors, i.e. without holding an account with a broker. Yet now it is those packaged structured products that he considers are becoming “redundant as a concept”. With platforms offering a route through which to buy ETFs/ETPs there is no reason why structured investments shouldn’t now be bought and sold in the same way, Stuff argues. This is the route that CUBE will be taking.

“Around 95% of new business is now transacted via platforms so it makes sense to design a structured product that can be quickly and easily bought via a platform,” he says. “So we’ve designed our business for advisers using platforms or providers like Charles Stanley and WH Ireland that have their own nominee service.

“There is no reason for buying a plan. Why would you open what amounts to an execution-only broker arrangement just to buy a single security? It’s just not needed anymore. So all our products are unbundled securities that are listed in the main public offering and so can be bought and sold via platforms.”

The sticking point is that not all platforms allow trading of ETPs and so, at present, this restricts distribution in this manner. The wraps largely accommodate ETPs, Stuff says, and he believes the fund supermarkets will be the next adopters before the life company-owned platforms. “We’re trying to work with them all,” he adds.

Whole of market research and risk rating

Aside from being a structured investment promoter, launching its own investments in the market, Cube Investing is using proprietary research developed by Investment Product Research to provide whole of market analysis of structured products.

“Investment Product Research has found a way to calculate the expected returns and the volatility of products,” Stuff explains. “This is the most significant aspect of what we’re doing. In the current regulatory environment no adviser or paraplanner can recommend a product unless they can demonstrate that the product is suitable for the customer. And suitability generally means that the risk associated with the product is appropriate for the client’s attitude to risk and capacity for loss. So unless you have a risk rating and an assessment of how likely it is that a product will generate a loss you cannot demonstrate that it is appropriate.

“Adviser haven’t had a reliable source of risk rating on structured products which puts the risk rating in the context of everything else they do, along the lines of the Distribution Technology, the synthetic risk and return indicator (SRRI) and Finametrica. This research will give them that ability to compare investments in the same way.”

The research section on the Cube website will include analysis of available UK retail structured products across the whole market. It will categorise investments from defensive to speculative, risk rate under the seven SRRI scores, and provide figures for the expected gain, Cube calculated expected growth and expected return for each product (explanations of these can be found below).

“It’s an effort to put some quantitative assessment on the products,” Stuff says. “It means also that the process of using the Matrix to select a product is almost writing half of the paraplanner’s or adviser’s ‘reasons why’ letter for them.”

Scenario analysis

In addition to the risk rating, all CUBE products have a Scenario Analysis within their brochure, which provides a percentage probability that, for example, the product will kick out at certain anniversaries or at the end of the term.

“What we’re giving the investor is transparency and a much clearer idea of the likelihood of these things happening, Stuff says. “And we’ll be doing this for third party products as well. It’s about giving advisers all the information they need to come to an informed decision for their clients.”

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CUBE structured product analysis includes:

CUBE expected growth rate

Is a compound annual growth rate. Cube calculates this figure based on average life and average payoff of the investment.

CUBE expected return

Is a figure that expresses the continuously compounded expected growth rate of a structured investment. It gives investors an indication of a rate of return they can expect from repeated investment in the product over time taking into account losses as well as gains.

CUBE risk score

Is a reflection of the volatility of an investment and is based on the worst 10% of simulated returns. Cube has taken the European regulator’s lead in mapping the volatility to the Synthetic Risk and Reward Indicator (SRRI) scale between 1 and 7.

CUBE expected gain

Multiplying the conditional gain by the probability of a gain generates an expected gain, or a probability adjusted gain. This reflects both the chance of a gain, and the scale of the gain that is expected.


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