Module 1: Structured Products: The Basics
Ben Streater on 25 Feb 2020
STROPRO is Australia’s first dedicated multi-issuer platform for structured products. We think Australian investors are missing out on this alternate investment solution due to a lack of three things; awareness, access and portfolio reporting. This education series aims to build awareness and understanding of structured products. We welcome any questions, observations or suggestions that might help us provide you with relevant information as you enter a new world of investment opportunities.
What are Structured Products?
Structured Products (also known as Structured Investments) are highly customisable investment solutions that accommodate a range of investor preferences. A structured product is assembled by an Issuer, usually a reputable investment bank, and provides exposure to a set of underlying assets.
They enable an investor to:
· Access to a broad range of asset classes (e.g. equities, fixed income, commodities, currencies)
· Target specific investment objectives (e.g. income, growth, capital preservation)
· Manage a range of risk profiles (e.g. low risk, balanced, aggressive).
According to the Swiss Structured Product Association, they are sufficiently flexible to accommodate any risk profile, no matter how challenging the market.
Who uses Structured Products and why?
Globally Structured Products are popular investment solutions in the portfolio of high net worth investors. Across Europe, UK, Asia and increasingly North America, Structured Products are being used to compliment or manage investor strategies.
Structured Products are utilised by institutional clients, private clients and family offices for diversification or tactical opportunities.
Traditional assets such as property or equities tend to only perform well in a rising market. Whereas Structured Products do not rely on a bull market, they are designed to generate a return aligned to your market view.
Can you give me an example?
There are many types of Structured products that can accommodate a broad range of investment objectives. Products can be structured to meet your objectives whether that be income, growth, or capital preservation.
Structured Products are market-linked investments providing exposure to various asset classes depending on the thematic view or demand of the investor. Unlike managed funds, the adviser & investor are in the driver’s seat – not the fund manager. The versatile and customisable nature of Structured Products allows you to take advantage of your particular view in order to achieve a particular outcome.
Below are three common types of Structured Investments:
1. Income Seeking Structured Products – pays a regular coupon based on a pre-determined risk buffer or “barrier”. Those who invest in equities for dividend income typically resonate with income-seeking structured products. In an income structured product, if the underlying asset trades above the pre-determined barrier, then your capital will remain protected. If the underlying asset falls below the barrier, the investor loses the protection and carries the same risk as if holding the underlying asset. Income Seeking Structured Products is a good choice if you expect the underlying asset price to remain relatively stable.
2. Growth Seeking Structured Products – closely track an underlying asset price over a defined term. Those who invest in equities for growth typically resonate with growth-seeking structured products. The underlying asset might be a single stock, index, fund or commodity. In a bullish market, these products are designed to pay the investor a higher return than the market. As an investor, you are still exposed to similar downside risks unless you opt to build in capital protection features.
3. Capital Preserving Structured Products – seek to preserve capital as the primary objective. Those who invest in cash for stability typically resonate with capital preserving structured products. Investors may still make gains based on the performance of the underlying asset class but limit the capital at risk.
What are the risks?
Structured products carry different levels of risk depending on the type of product, underlying asset class and parameters of the specific product. Some key risks include:
Market Risk: When the underlying asset performs below expectations or adversely to the pre-determined risk parameters, the investor can expect a reduced return or potential loss of capital.
Mitigation – Stropro provides comprehensive portfolio management tools to ensure you are well informed of any market conditions that might impact your investments. Additionally, we provide access to market insights for you to make informed decisions.
Issuer Risk: If the issuer becomes insolvent, the holder of a structured product will be treated as an unsecured creditor. Investors should consider the creditworthiness of each issuer.
Mitigation – Stropro only partners with reputable investment banks with high credit quality.
Liquidity Risk: Most products are designed to optimise the risk/return trade-off to capitalise on a particular market view. This means they are typically designed to be held to maturity.
Mitigation: Most Issuers that partner with Stropro facilitates daily liquidity, however, embedded break costs may impact your return.
How can I find out more?
Should you have any questions or to speak to us about how we can help please contact us at email@example.com
This education series provides general information only and is not intended to provide financial advice.