The Structured Investment industry is often considered as one in which retail investors have more alternative routes to enter into the investment markets, in terms of underlying assets and the variety of pay-offs available. However comments such as “they’re ideal when volatility is high”, “when markets are low geared products have their place” or “kick-out plans are less attractive when markets are toppy” are consistently thrown around by many familiar with investment markets. But, in truth, the flexibility afforded by these gems of the investment world means that they can be structured to suit not only many different individual risk appetites but also many different investment market cycles.
Over the last five years or so, and on top of the usual equity highs and lows, the investment markets have had to swallow some sizeable issues such as the fall-out from Lehmans, the resulting credit and liquidity crisis, the banking crisis, recession, fear of a double dip recession and now the continuing Eurozone debacle. Structured investment products are ideal for defining risk, return, exit, and direct entry into the investment markets, may not be attractive.
| Feature | What does it mean? | How does it influence the product? |
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| | Capital Protection | A fixed level of protection regardless of the performance of the underlying asset. | Apart from the counterparty risk, this is as near to guaranteed protection as you can get. However, it is not always 100% and needs to be checked. Generally, the higher the protection level, the lower the participation level. |
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| | Soft Protection | Protection of the initial capital is dependent on the performance of the underlying asset. The protection level may reduce or even disappear if the underlying asset breaches a certain level on the downside. Where this floor is set affects the cost of the product and therefore will affect the participation levels. | Whether capital or soft protection is chosen and at what level, is dependent on the risk profile of the client and their confidence in the markets. Where there is more than one underlying asset or index, terms need to be examined closely to determine how many of the assets need to breach the levels set before downside protection is affected. |
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| | Participation | The return at maturity is based on the performance of the underlying asset, but is often geared to return a fixed percentage of the performance of the underlying assets at, greater or less than 100%. | Usually the higher the participation rate, the less the level of protection and/or a lower capped maximum. |
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| | Capped Upside | Return is capped at a defined maximum. | While the participation percentage may look attractive, uncapped returns at a much lower participation rate may prove more rewarding. |
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| | Uncapped | Return is based on the performance of the underlying asset, with no upper limit. Can be geared to produce a higher percentage return than that of the underlying asset. | Generally, the higher the participation level, the less protection available. May return more than a capped version despite lower participation |
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| | Kick-Out | If the original target return or a predetermined level is reached early (usually at a specified point during the term), the plan will mature early. | Usually a good thing for investors. |
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| | Averaging | The standard structure takes fixed points at the beginning and/or the end of the term for measuring the performance of the asset. In an averaging structure, the return is calculated by averaging multiple points over the term of the asset. | During the averaging period overall return will be dampened in a rising market, but cushioned in a falling market. A useful comfort factor for some, it is a mechanism for reducing the cost of the underlying instruments. |
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| | Gearing | Can be applied to the upside and/or downside participation. On the upside, returns can be structured to pay a fixed percentage of the performance of the underlying asset, usually more than 100%. This can also be applied to the downside, magnifying potential losses. | Generally, the higher the gearing, the less the protection. For retail products there is not often downside gearing but this is something that still needs to be checked. |
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| | Lock-In | Often part of a minimum return feature. If the underlying asset reaches a certain level over a pre-determined period of the term the minimum return can increase to this new level. | A nice feature to have, at a cost, and will depend on the advisers/ investors attitude to the markets. A higher participation rate or more protection may be more appealing. |
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As the name suggests this is a structured investment designed to give the investor a range of benefits, fixed returns, fixed risk, and defined terms & exit strategies. They cover almost all asset classes incl: - Commodities
- Equities
- Precious Metals
- Currencies
A list of recently available structured notes is shown to the right. As can be seen they are provided by major international financial institutions and have a broad range of potential returns. The key benefit of these products are known risks, and known exit strategies. As long as the underlying assets perform to a certain minimum level, the client will know what return to expect. Structured notes can be purchased online via platforms such as Offshore Fund Supermarket
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This list of recently available structured notes is for information purposes only, and should not be classed as a recommendation or solicitation to purchase. These products are commonly available via investment platforms, or through your financial advisor.
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