Moonstone: Structured Products

The following article was recently published by Cadiz:

Why invest in structured products?

A major attraction of structured products is the ability to offer capital security. For many investors, the knowledge that, at worst, they will receive back their original investment is as important as the potential to generate excess returns.

Structured products are referenced directly to an underlying asset with a pre-defined investment return profile; they do not rely on performance in the same way as actively managed investments, such as funds.

Structured products provide a straightforward mechanism for accessing asset classes that would otherwise be difficult for the individual to invest into directly. Topical examples would be products based on emerging market funds or even raw commodities such as Uranium.

The majority of products are for a fixed-term and purchased net of fees, meaning they have a transparent and defined payoff profile. Again this is seen by many as an advantage over funds which can have ambiguous Total Expense Ratios (TERs) which can reduce actual returns.

Capital protected products are useful for risk averse investors who are taking their first step up the risk spectrum from cash or bonds. Capital protected products are also useful for investors as they approach retirement and are looking to protect some, or all, of their portfolio without completely disinvesting from the market.

Not all structured products are suitable for all investors. Although the returns are generally clearly defined upfront, investors need to understand the potential scenarios under which they will not perform. This is something that can be assessed prior to investment because the risks and returns are known prior to investment.