Defensive Income Structured Product
Rory Turner on 02 Jun 2023
Case Study Type: Product Performance
In this case study, we demonstrate how a structured product delivered a guaranteed1 income stream during a period of market volatility. Additionally, it is worth mentioning that although it was not a primary objective, the product also outperformed U.S. consumer staple stock.
This period was characterized by a macroeconomic environment that presented various challenges and uncertainties for investors. Factors such as extensive fiscal tightening, geopolitical instability, and a departure from a decade of quantitative easing created a complex financial environment that required careful navigation.
Prominent financial institutions like J.P. Morgan and Blackrock emphasised the success in navigating these uncertainties hinged on proactive readiness, flexibility, and high-quality, diversified investments.
Let's explore how defensive income structured products can be a powerful addition to investor portfolios.
Markets in 2022 were rife with volatility. The global pull back from risk assets alongside plummeting bond prices led to many groups retreating to cash. However cash was still fairly unattractive, with term deposits and Bonds yielding less than 2%.
The uncertainty around equity markets and the need for secure income strategies was prevalent among Stropro clients. They needed a means to tactically deploy capital without the impending threat of a market downturn.
Stropro’s investment team identified that a structured product linked to U.S. consumer staples with a fixed quarterly coupon would provide resilient income through a potential recessionary period.
Consumer staples is generally considered a defensive sector, the necessity of these products for daily life means the revenue stream is predictable and stable, even through an economic slow-down. Buffering exposure to this defensive sector using downside protection offered by a structured product piqued the interest of even the most bearish Stropro clients.
Consumer Staples Fixed Coupon:
Linked to Walgreen Boots, Walmart, Colgate-Palmolive and Procter and Gamble
The 1 year strategy delivered a robust 7.75% p.a., paid quarterly. This return surpassed the dividends paid by the four companies at the time and far exceeded the meager approx.0.25% rate offered by term deposits. (Sourced via RBA Statistics)
One key advantage of the structured product was that it provided protection to the client's capital against market downturns of up to 35% through a downside barrier feature. This barrier was observed at maturity, meaning that although daily market fluctuations were monitored, the critical measure of performance was the value of the reference assets at the end of the investment term.
Downside protection is a common feature in structured investments, offering our clients the opportunity to achieve a defined return with significantly reduced risk compared to direct exposure to equities. It serves as a crucial safety net against capital loss, demonstrating the resilience and effectiveness of structured products in volatile market conditions.
During the product's duration, the stock markets remained volatile, and the four stocks in the basket faced pressure. Walmart experienced its largest single day loss, while Walgreens dealt with a significant lawsuit. Fortunately, the downside barrier mechanism shielded clients from incurring losses in such challenging market circumstances.
This case study underlines the potential of structured products as a powerful instrument in a volatile market. It showcases how Stropro, via its customisable solutions, can facilitate defensive income strategies, contributing to stable returns even in uncertain times.
At the core of this success story is the structured product's dual attribute: reliable income generation and downside risk protection. This combination, when strategically applied, can offer a buffer against market turbulence and help generate positive outcomes.
Our commitment at Stropro is to continue providing clients with a broad spectrum of alternative investment opportunities, enabling them to build modern, robust portfolios tailored to navigate the challenges of the evolving financial landscape.
1. Guaranteed by the issuer. Further information can be provided to registered wholesale clients.
Stropro's ability to access a wide variety of strategies offered by our panel of issuers, including 6 global investment banks, gives our clients unparalleled capability. It enables us to facilitate customizable solutions tailored to our clients' needs, irrespective of market conditions.
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This information is for educational purposes and is not a substitute for professional and tailored financial advice. This information expresses the views of the author(s) at a point in time, which may change in the future with no obligation on Stropro or the author to publicly update these views. This information uses information from sources the author considers to be reliable but does not represent that such information is accurate or complete, or that it should be relied upon. Past performance is not a reliable indicator of future performance. Investments may rise and fall in value and returns cannot be guaranteed. Stropro makes no representations or warranties, express or implied, as to the accuracy or completeness of the information it provides. Stropro is a Corporate Authorised Representative (CAR No. 1277236) of Lanterne Fund Services Pty Ltd (AFSL No. 238198).