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.