Investing in Structured Products
Structured products are instruments that promise to deliver tightly specified outcomes over a period of time. One example of this is a product that will deliver, say, 125% of any growth in the FTSE100 index over a specified period while protecting holders from any loss. At a first glance this appears to be too good to be true but the catch is that the product offers no income. There are also products available, however, that offer to pay out high levels of income but where capital is at risk if some pre-determined event occurs (for example if an index falls below a certain point).
There are structured products available offering exposure to a wide range of assets from equities to commodities to interest rates. The techniques underlying these products are highly complex but usually what the holder is offered is a loan note issued by a highly creditworthy bank. Holders, therefore, do not need to make the effort to understand how the products work but can rely upon the reputation of the issuer to ensure that the promised outcomes are delivered.
One important point to understand about structured products is that they need to be held for their whole term if they are to deliver the outcomes that they are designed to offer. While it is often possible to buy and sell such products on a secondary market it is necessary to have a very clear understanding of the implications of doing so on the returns that will be delivered.
We consider that structured products may be appropriate investments for some clients in some circumstances. Products with downside protection may be attractive to those investors approaching retirement who wish to participate in equity gains (if any) but who cannot afford the risk of losing money. Structured products may also be an attractive means by which investors can gain exposure to certain assets that would be difficult to hold directly; commodities for example.