The current appeal of structured products

Warren Buffet has always said that if you want to make money, you cannot rely on one source of income. Diversification is the spice of life and your clients are always on the lookout for an effective passive income.

There is an increasing trend amongst high net worth individuals seeking access to foreign equity markets in order to diversify their portfolios. This is partially being driven by the recovery of equity investments in Europe and Japan where clients are able to buy low to sell high at a later stage.

Structured Products provides not only an easy and cost effective manner to gain this exposure, but also allows the investor in many cases to protect their initial capital.

Increased demand

This has resulted in a newfound popularity of these instruments among private clients. One of the most significant reasons for this is the variable performance of managed funds offered relative to the structured products.

Another major factor is that the costs associated with structured products are disclosed and included in the payoff profile of the product, and in many cases are proving to be lower than those associated with traditional solutions.

The negative sentiment traditionally associated with some structured products seems to have dissipated over the last few years as improved regulations, better disclosure and an enhanced understanding by advisers and investors alike has led to increased demand and resultant investment volumes.

The weight of evidence is finally tipping the balance. This is where the role of the wealth manager comes in - many of whom now allocate funds to structured products as an asset class within their diversified portfolio offering. This means they are able to benefit from their outperformance while making use of their ability to access foreign or illiquid asset classes.

Offshore market allure

The ability to access offshore markets in an easy and cost efficient manner has contributed to the rise of structured products as an alternative asset class. This is because high net worth individuals are being drawn to the geared returns while the capital preservation is high on their list of priorities.

However, the ability of structured products to deliver clearly defined returns is where they really shine. Investors and their advisers can determine their target return and then review and assess the level of risk to investor capital associated with the delivery of that return.

For example, a FTSE 100 Autocall can deliver annual returns of around 10%/y in Pounds terms if the index remains at or above the initial level on any one of the anniversaries from the second year onwards.

This is a simple performance target for investors to understand and measure, and the capital risk that comes with the investment - full capital return if the index is above 60% of its value at maturity - is equally straightforward.

Contrary to popular belief, this clarity of outcome or simplicity in the product is another reason they have gained popularity. In short, these investments are doing what they say on the box.

Appeal in simplicity

This simplicity, as well as the ability to have a clear understanding of what returns will be delivered by their investments under different market conditions is particularly appealing to investors.

Investors can have an investment tailored specifically to meet their objectives, either by way of access to foreign markets, or through the shape of the payoff.

Improved disclosure regarding the risks typically associated with structured products - such as credit risk, volatility and term to expiry - is leading to an investment community that is increasingly comfortable participating in this market.

Structured products can deliver accelerated returns in rising markets and preserve capital when markets deviate from an upward only trajectory. It is these attributes that appeal to wealthier investors and allow them to achieve their investment goals.