Investing into Structured Products
Like many good things in life, Structured Products are often misunderstood and their value underestimated.
In essence, a Structured Product provides the opportunity for clients to have an investment linked to the growth of a range of underlying assets including stocks and shares, commodities, property etc and in doing so potentially enjoy greater returns than the performance of the actual assets themselves. In addition, most products have some form of in-built protection to mitigate against significant falls in markets, a, valuable feature which should never be underestimated in these uncertain economic times.
As an example, we have worked with a range of Banks on an exclusive basis over the past 5 years, developing a portfolio of products called Autocallable Notes (yet another complicated title!!). Investors in these products have their investments linked to a range of stock markets for a period of typically 5 Years and during this period the portfolio is subject to a regular, simple test (normally every 12 months). This test purely asks one basic question each year: are the markets in which the client investment is linked equal to or higher than they were at the date the initial investment was made. If the answer is yes, then the client will be paid a coupon and have their initial investment returned in full. Some of the coupon levels over the past few years have been approaching 20% per annum. If the answer is no, then the product continues for a further 12 months when the test is repeated. Each time the test is undertaken the total return that the client receives will be equal to the coupon % multiplied by the number of years the investment has been held.
If the answer is always no for the first 4 Years of the investment period then the product runs through to the maturity date (typically 5 Years) where there are 3 possible outcomes:
Outcome 1: The Investment has passed the test on the maturity date = 5 Years’ worth of coupons and initial investment returned.
Outcome 2: The underlying stock markets are lower at maturity than they were at the initial date of investment but are above a pre-defined protection level (typically 40%) = Full return of initial investment only.
Outcome 3: The underlying stock markets have fallen below the protection level = Return of client’s investment based on the performance of the relevant stock market or markets.
As already highlighted, the value of the protection barrier should not be underestimated, as in the above example, it would require the relevant markets to fall by more than 40% before clients had any exposure to potential losses on their capital.
It is reassuring to note, that since we provided our first Autocallable Note to clients approximately 5 Years ago, that not one of the these products has reached maturity without clients receiving both a full return of capital and related coupons. In fact, in the first 3 1/2 months of 2013 we have already seen successful early maturities on more than 20 such products.
The growing interest in Structured Products from clients is very much a testament to their continued value in the current market climate and we will continue to strive to create the very best products available in the market and provide these on an exclusive basis to clients.
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