In the UK, in 2008, nearly 100 providers issued nearly 1,000 structured products, collectively responsible for retail sales of nearly £10billion. Sales volume of this magnitude reflects the diversity of offerings and demonstrates the appeal and flexibility of structured investments to add value in many ways in investors’ portfolios.

Investing with the benefit of defined investment risk and returns potential clearly empathises with the interests and requirements of many investors. Especially during periods of stockmarket uncertainty or volatility structured investments can quantify and specifically state the levels and types of investment risk that may apply to an investor’s capital and/or investment returns. ‘Intelligent’ structured investments can therefore provide innovative and compelling client-centric investment solutions, as alternatives or compliments to traditional investment funds. However, a key risk borne by investors, in structured investments is ‘counterparty risk.

Recognising the importance of the structured investment industry encouraging deeper working knowledge and understanding of structured investments among advisers and investors, award winning structured investment specialist Blue Sky Asset Management (recognised as ‘Best in the UK’ at the pan-European ‘Structured Products Europe’ awards in 2008) has introduced a unique ‘Guide to Understanding Counterparties’, to help professional advisers and investors.

The guide – the first of its kind – provides an authoritative but reader-friendly introduction to the role and relevance of counterparties in structured investments, and an overview of relevant ‘due diligence’ considerations for advisers and investors when considering structured investments. It includes:

• A definition of counterparties, and an explanation of their role and relevance in structured investments
• An introduction to the main credit rating agencies and details of credit rating designations – with a comparison of the differing ratings
• An introduction to credit default swap (CDS) spreads – with background to the CDS market and how CDS levels can be incorporated in counterparty due diligence
• Confirmation of compensation scheme rules applying to structured investments
• A conclusion that emphasises the need for a balanced, sensible and prudent approach by advisers and investors considering structured investments

In addition to the guide, Blue Sky Asset Management has also unveiled a unique ‘Counterparty Platform’, accessed via its website, that provides a single screen, at-a-glance’, view of counterparty due diligence data – for all the major counterparties.

Blue Sky Asset Management (BSAM) operates with total independence from all counterparties, without any institutional bias – providing a significant benefit and advantage to investors. This is distinct from the majority of structured investment providers, who are often linked to an internal and solitary investment bank or counterparty. BSAM’s approach to counterparty evaluation, selection and monitoring places emphasis on deep and robust due diligence.

Credit ratings and credit default swap spreads are both important indicators of the credit quality and financial strength of counterparties, however BSAM does not place over reliance on either indicator, especially in isolation – instead, both are taken into account, with similarities, differences and/or anomalies considered and assessed. Further, in addition to assessing headline indicatorsof corporate strength, ie credit ratings and credit default swaps, BSAM considers wider aspects of counterparties’ background, including Group aspects, to be relevant – and takes into account the specifics of how individual counterparties manage their derivatives business, their structuring capabilities, and their commitment to post-sales service for investors.

In addition to ‘understanding counterparties’, in terms of their role and relevance in structured investments, together with the input that is offered regarding sensible consideration of counterparty due diligence and assessment, BSAM’s Guide offers two general points of sense for advisers and investors, in conclusion:

A ‘Flight to Quality’: BSAM highlights that discerning advisers and investors should seek providers and structured investments that utilise counterparties that are highly rated and regarded, taking into account various and combined factors in a balanced approach. Higher headline rates on structured products can be achieved by providers who utilise (or are internally linked to) weaker counterparties – but advisers and investors should differentiate between headline rate driven products and potentially better value investment integrity.

Diversification: Further, and as with any type of investment, BSAM points out that prudent investors should seek to diversify their portfolios – which in terms of structured investments most importantly means considering the underlying counterparty, and limiting, or diversifying, exposure to or reliance upon any single counterparty. BSAM’s independence of all counterparties facilitates potential diversification of counterparty exposure, through the range of institutions that it works with, in terms of its series of Plans.

Intelligent, client-centric structured investments undoubtedly have a major role in wealth management in 2009, as investors seek genuine solutions to the obvious economic and investment challenges of historically low interest rates and sky high equity market volatility and uncertainty. However, the role and relevance of counterparties is critical in structured investments – and now more than ever advisers and investors must ensure sensible working knowledge and consideration/due diligence of counterparties, when considering a structured investment plan.

The Blue Sky Asset Management Guide increases the working knowledge of structured investments – and will prompt thinking and questions that advisers and investors should be asking of any provider: and that any provider should be capable of answering.

For a free copy of the Blue Sky Asset Management ‘Guide to Understanding Counterparties’ contact info@bluesky-am.com or telephone 020 7096 7100.

To view the Blue Sky Asset Management ‘Counterparty Platform’ visit:
www.bluesky-am.com