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A structured product is a type of investment that combines the features of traditional equities investing with the benefits of protecting the initial invested capital from loss while providing exposure to higher returns than what the market would typically offer. Their ability to offer clearly defined investment outcomes and unique risk-return profiles makes structured products an attractive investment opportunity in uncertain and volatile markets, with these factors being driven largely by the capital protection element, which aims to safeguard a portion or the entire amount of an investor’s original investment should the market underperform.
Below are general characteristics found in structured products:
Capital protection
In many instances, structured products provide investors with 100% capital protection.
For example, investors will have 100% capital protection where the underlying index is down no more than 30% at the end of the investment term. In this example, should the loss exceed 30%, the investor would absorb the loss and have the balance returned to them.
Read also: Where should investors be investing?
Enhanced returns vs market performance
Structured products pay returns in coupons, whose returns often exceed the performance of the underlying index.
As an example, should the underlying index be in positive territory after the first 12 months of investment (i.e. the index is above its starting level), the investor will receive a 15% return, whereas the index may only have returned 2%. Should the index be in positive territory for the first time in the third year, the investor will receive a 45% return and their initial investment. The enhanced return (the coupon return multiplied by the number of years invested) is a result of the coupon having a “memory feature”, a distinctive feature of structured products.
Diversification
Structured products offer investors diversification, as in almost all circumstances, the underlying investments are indexes (for example, S&P 500, the Nikkei 225, Bloomberg Tech Titans etc.), and, in some cases, indexes are combined to offer different risk-return profiles.
Bank guarantee
All structured products are issued by large financial institutions. The rating of the financial institution determines the counterparty risk for the investor.
These ratings are allocated by agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings. It is important for the investor to consider the rating of the financial institution before investing.
In summary, structured products have several benefits, such as defined returns, capital protection, and portfolio diversification. However, like any investment product, they also come with potential risks, such as issuer default risk and market risk, which can lead to capital loss. Hence, it’s crucial for investors to consider these factors and to seek professional advice before making any investment decisions.
Jaltech’s offshore structured product investments have three investment windows this year. These will occur during the first week of September, October, and November. For more information, register for one of Jaltech’s virtual launch events by clicking here or click here and complete the enquiry form, and a representative of Jaltech will contact you.
* Chris McCormick & Jonty Sacks – Jaltech Fund Managers
