What is a Structured Product?
A structured product is a pre-packed investment strategy that manages risk by exposing
the investor to a mix of equity indices, a basket of stocks, currencies, interest
rates and commodities.
The investor’s required capital protection is one element which effectively
determine the structured product. Another is the derivative which links the investment
with an underlying index, a currency or a basket of securities.
A well-diversified portfolio will benefit highly from the introduction of structured
products as they can add significant value when they fit within the overall strategy
of the investor. Additionally, these products can also work to enable access to
different assets classes in private client portfolios.
Usually, Wealth Managers will present the idea of an investor opting for a structured
product instead of a bond.
Q. If a structured product can go down in price because it is linked to an underlying
index, or because of its bond content/volatility shifts, where should structured
products be placed in client valuations?
A. Some believe structured products should come under a separate section in a client
valuation, but when using them in a portfolio, they can be used to replace fixed
income or equities.
Q. How are structured products classified by companies? If a client holds a structured
note instead of US equities, is it listed under US equities?
A. Structured Products allow clients to access other asset classes, hence the term
derivative, making them difficult to classify. But, with that being said, they are
usually placed into valuations based on underlying exposure.
Naturally, being aware of risks is necessary and there are some underlying ones
related to structured notes. For example, exposure to one institution can add up
across a range of structured products with potential cross-over with fixed income.
Structured Products work to ensure that the investor is not exposed to concentrated
counterparty risk – thanks to new types of products coming on the market.
A new breed of structured Ucits funds hold a range of structured products, rather
than being based on one autocall. This type of fund, based on a range of products,
means providers can reduce the amount they have in collateral gilts, so they have
more opportunity to generate returns than a typical Ucits III offering. There is
also no exit date, because the product is continuously being rolled forward.