Part 1: An Introduction to Structured Products

Structured Products are highly customizable investments that come in all shapes and sizes. Financial advisers, private bankers and family offices make use of their flexibility to design an investment that suits their clients’ financial goals best. There are hundreds of different structures and permutations! For most retail designs however, Structured Products come with a certain degree of Capital Protection and provide periodic payouts.

Under the Hood

The reason why a Structured Product can provide Capital Protection and periodic Coupons (think dividends) is because it is split into two components:

  1. A traditional security such as a low-risk bond, and
  2. Derivatives / other instruments required for the investment strategy

The illustration below uses a $100 investment example to explain this concept very simply.

To put it in words, Structured Products are investments that can provide protection on the invested capital, and potentially some form of additional returns. In the simplest terms, the asset class can actually be seen as a strategywrapped into a single investment.

Of course the amount of protection and returns would vary according to the risk appetite and financial situation of each investor. The 80-20 split in the illustration would definitely not apply to everyone. Financial advisers can work with their product providers to customize each product according to the needs of their clients. For example, for a client with a lower risk appetite than the one above, his customized investment could have a 90-10 split i.e. a larger allocation into the traditional low-risk bond.

Other Aspects to Customize

In the simplest terms, the performance of a Structured Product is based on its Underlying Assets. It could be a single Underlying Asset, or a basket made up of stocks such as Apple and Bank of America; Indices like FTSE 100 and Nikkei 225; or even commodities like gold, oil and gas.

Unlike mutual funds, investors get to pick (subjected to their financial adviser’s recommendation and evaluation) the actual Underlying Assets they want to invest into. For investors feeling exceptionally optimistic about the tech giants for example, they may prefer a basket of stocks like Facebook, Microsoft and Google. For someone else interested in the Asian market, their adviser will probably put together a basket of stocks like Alibaba, Mitsubishi Corp, and Samsung.

Conclusion

The variations and strategies Structured Products allow are endless, so this article would definitely bore you to death if we were to discuss the infinite possibilities. To maximize the versatility of this asset class to suit you best, investors should contact their financial adviser for a recommendation according to their risk appetite and financial goals. If you do not have a financial adviser yet, please do not hesitate to get in touch with us at contact@districteastcapital.com and we would be happy to direct you to an authorized adviser in your region.

For financial advisers who would like a PDF version to help with educating their clients, please drop a line to contact@districteastcapital.com. We have a strong track record in supporting our partner IFAs in their work but for a limited time only, this service will be available to non-partner IFAs as well!

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