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Structured products: A viable option for today

Structured products: A viable option for today

Feb. 24, 2016

Feb. 24, 2016

In today’s era of heightened volatility, structured products play an increasingly important role in helping institutional clients realize their long-term goals. In a recent survey conducted by intelligence provider Structured Retail Products (SRP), 60%1 of respondents preferred structured products to listed equities. They cited “ease of use, flexibility of design and speed to market” as key attractions.

Gains in structured products are generally made through exposure to a stock index, while capital protection is achieved via a zero-coupon bond. Other structures include fixed income, commodities or currencies. One key feature all structured products share is the trade-off of capital protection or upside potential for a pre-defined level of risk.

There are three primary types of structured products:

 - Structured deposits: Capital is invested in cash deposits, with interest payments linked to a stock index. The full initial amount is returned to the investor, even if the index falls in value.

 - Structured investments with capital protection: investors participate in the growth of an index that is capped at a certain level, but capital is 100% protected at maturity.

 - Accelerated products: These offer a multiple of index returns—typically four or five times its growth. Some newer products provide unlimited potential at the cost of sacrificing downside protection.

Why are structured products attractive to investors?

The “rules” governing structured products are agreed upfront, and this is arguably the biggest attraction: They target pre-defined returns, and investors are fully aware of the index level that will make gains, or conversely, lose money. For institutional clients, setting risks and returns in clearly defined parameters makes long-term portfolio planning easier. This is especially true for pension fund trustees, for example, who require long-term growth, and who can forego access to the investment during its term.

Risk awareness is a key consideration

The biggest criticism of structured products is the complexity of associated risks, including counterparty risk and market cyclicality. For example, if the price of options becomes expensive, then rates of return from fully capital-protected products would be much lower than in previous years, when options were cheaper. Additionally, many structured products are linked to a capital-only index (EURO STOXX 50®, for example). This represents an opportunity cost rather than a risk, but it’s significant; by excluding dividends, investors miss out on a source of reinvested income.

Regulations help protect investors but will they go too far?

The main regulatory concerns around structured products are 1) quantifying and protecting against counterparty risk, and 2) ensuring that the products themselves are marketed appropriately. Legislation, such as Basel III, addresses the first through more robust balance sheets and capital adequacy requirements. This is important for investors because it should make default less likely. To address the second, product providers are now required to give clear, up-front information on the financial strength of its counterparties. 

While these developments protect investors, some industry participants are concerned about product development, voicing fears that the spirit of innovation will be quelled by over-zealous regulation. Although it’s too early to make a call, all eyes will be focused on the development of MiFID II, a European directive slated for 2017. Still, investor protection is better than ever before allowing structured products to occupy a prominent role in portfolio planning for sophisticated investors. 


1”Analysis on Structured Products and Listed Equity Options in Europe: An Industry Overview and Future Prospects” SRP, 2015. 



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