The Memory Feature
Whether Index-based or Equity-based Notes, many investors love the Memory feature. Like its name suggests, the feature “remembers” missed Coupons, and pays them out in the next successful Observation (check out our previous articles to understand how an Observation works!). This feature helps maximize profits despite market downturns, and it certainly is something most investments cannot offer.
What we tend to forget is that a Note with Memory is NOT always better than a Note without. Whether Memory feature or no, each structure should be tailor-made to suit the investor’s preferences.
Price of a Memory Feature
Introducing the Snowball Memory feature into your Index-based product comes at a price. On the right is a price comparison of a Note with and without Memory (these are real prices done in January 2019).
With Memory, the Note prices in at 8.8% per annum. If we remove the Memory, returns go up to 11.1% per annum. This makes sense because Memory provides extra assurance on the returns – when risk goes down, so do the potential returns.
Assuming Quarterly Observation, in the graph above, each Coupon for the Memory (blue) and non-Memory Note (orange) will be 2.2% and 2.775% respectively. The graphs are drawn to scale.
Each blue Coupon is smaller and has a lower value than that of an orange one.
Five blue Memory Coupons is just about equivalent to only four orange non-Memory ones. Each Observation gives more profits in non-Memory Notes than a Memory one.
In Other Words…
If a market downturn occurs in the last couple of months of the investment term, there would not be enough time for market recovery and a next successful Observation. Before the market downturn, Investors would have received the same number of blue and orange Coupons. Since each orange non-Memory Coupon is larger, investors in the non-Memory Note would have made more profits in this sort of situation.
In another scenario, if the market recovers before the product matures. Investors in the Memory Note would now receive all the blue Coupons they had missed and thus profited more.
For readers still with us – from the illustration above, recall that 5 blue Memory Coupons is equivalent to 4 orange non-Memory Coupons.
Mathematically-speaking, for the Memory Note to have provided more growth, it has to pay Coupons at least 4 out of every 5 Observations. Otherwise, the non-Memory Note would have provided more growth via the larger size per orange Coupon.
Do note that this 4-5 Coupon ratio applies specifically to this illustration only. Other structures could have a different memory-non-memory Coupon ratio.
How to Use Memory
Generally speaking, the objective of the Memory feature is to maximize the investor’s chances of receiving Coupons. Although the potential returns decreases, the Memory feature creates an additional scenario where growth is ensured – when markets dip for a short while and then recover. Adding a Memory feature to a structured product increases the overall safety, regardless of the investor or Adviser’s market outlook.
The Memory feature is indeed useful, and an especially attractive feature. To really take advantage of the flexibility of structured products however, investors should always consider the tradeoff for a Memory feature. Will adding a Memory feature create an investment that’s most in-line with what I am looking for?
On top of dealing with a full-time job, it may get tedious for retail investors to navigate through all the financial jargon and keep up with market changes. To maximize the versatility of this asset class to suit you best, investors should contact their financial adviser for a recommendation according to your 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 email@example.com and we would be happy to direct you to an authorized adviser in your region.