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Investors have had to deal with considerable levels of uncertainty in financial markets of late. This is largely a consequence of the pandemic, wild policy setting from central banks, constrained supply chains, volatile energy prices, a war in Europe, and decade-high inflation being fought by rapidly increasing interest rates.
In the face of this uncertainty, structured products have become increasingly popular among South African investors, largely because structured products provide investors with downside protection (i.e. the original investment is protected under certain conditions) should the markets under perform, whilst still giving them exposure to the upside potential of the market.
However, unless you are a private client at some of the top-tiered banks, structured products may be an investment which you have never heard of, or you might not be familiar with their inner workings. To assist, below is a brief introduction to structured products:
What is a structured product?
A structured product is an investment note which provides investors with exposure to the global or local listed markets, for example, the S&P 500 or the Nikkei etc (or a combination thereof) and includes a mechanism which under certain circumstances protects the investor’s initial capital investment.
Capital protection
Most structured products provide investors with capital protection should the markets perform negatively during the investment term. This safety net affords investors some peace of mind that their principal capital is protected should markets come down. Most structured products offer capital protection provided the following occurs:
- The investor remains invested for the entire term of the investment;
- The market doesn’t drop below a predefined level. For instance, most structured products provide 100% capital protection if the market doesn’t drop below 35% at the end of the 5-year investment term. If the market drops by 36% or more then the investor will lose whatever portion of the market is down;
- The financial institution issuing the product remains solvent.
Investment term
Structured products typically have a 3–5-year maturity period, meaning that if an investor wants to extract the full benefit of the product, they will need to remain invested for the full investment term. There may be an option to withdraw funds early, but this will likely result in the investor forfeiting any capital protection as well as any potential upside returns.
Investment exposure
The underlying investment exposure in structured products consists of stock market indices, for example, the S&P 500, Swiss Market Index, the Nikkei 225, etc. In some cases, a structured product may combine two or more indices giving the investors a unique risk and potential return profile.
Types of structured products
Two of the more popular types of structured products are Autocall structured products and Geared structured products.
An Autocall structured product is designed to provide investors with the potential of earning a fixed return if certain market conditions occur at defined periods during the investment term.
For example, an Autocall structured product may offer investors a fixed return of 15% p.a if all the underlying indices are flat or positive from their starting position annually at the anniversary date of the investment. If this event does occur, the investor will receive his/her principal capital amount plus a 15% return for every year the investor is invested.
In other words, using the above example, if all the indices are flat or positive for the first time in year three, the investor would receive his/her principal capital amount plus a 45% return.
A Geared structured product offers investors the opportunity of earning a multiple of the performance of the underlying index at the maturity date. For example, an investor could invest in a structured product which offers the investor 6 times the growth of the S&P 500 over a 5-year term provided they remain invested for the full term.
Investor profile
Generally, structured products are designed for investors who are looking to protect their capital or for investors seeking an investment that will form part of the conservative portion of their portfolio.
Structured products provide significant value in periods where investors expect heightened volatility or uncertain returns given unpredictable market conditions. The benefit of structured products in this type of environment is that they offer investors capital protection and at the same time exposure to the market. Given the current geo-political environment and the factors mentioned above, investors should strongly consider adding structured products to their portfolio.
Chris McCormick & Jonty Sacks – Jaltech Fund Management
Jaltech offers investors exposure to various structured products, for instance:
The Jaltech Developed Markets Autocall
The Developed Markets Autocall is linked to three global indices, namely the S&P 500, the Swiss Market Index, and the Nikkei 225, and offers investors 100% capital protection provided that none of the indices have dropped by more than 35% at the 5-year maturity date.
The Developed Markets Autocall immediately triggers a coupon of 15% per annum if the indices are all flat or positive at the 1st-anniversary date and thereafter semi-annually until maturity in year 5.
The Jaltech S&P 500 Autocall
The S&P 500 Autocall is linked to the S&P 500 index and offers investors 100% capital protection provided the S&P 500 has not dropped by more than 40% at the 5-year maturity date.
The S&P 500 Autocall immediately triggers a coupon of 7% per annum if the S&P 500 is flat or positive at the 1st-anniversary date and annually thereafter until maturity in year 5.
If you are interested in finding out more, click here and complete the enquiry form, and a representative of Jaltech will contact you.
