A structured product is a type of investment that invests your funds for a set period of time and is designed to give you growth, income or both. These products can be designed for all risk appetites, from low risk to high risk. CheckRisk creates bespoke product structures for institutional clients only, and does not deal directly with retail clients. If you are not sure they’re right for you please get professional financial advice, or contact us.
As an independent agent, CheckRisk can tailor a solution to suit your specific needs. We aim to secure the most competitive terms we can in regard to the potential upside, downside protection and the product cost. CheckRisk can also provide you with ongoing after sales service, reporting on product pricing and the provision of a range of our in-house models to keep track of your portfolio. We are remunerated by our clients directly, and are not paid commissions by any investment bank/insurance company. We work for you.
Structured products or ‘capital at risk’ products can give you a much greater amount of control over your portfolio investment strategy. One of the main benefits is that they offer a defined pay-off; you know what you are going to get if the conditions of the investment are met. This is in contrast to ‘normal’ types of investments such as equities or bonds whose prices vary. These type of traditional investment may outperform a structured product if market conditions are favourable, but they may also do worse if market conditions are poor.
Structured products are a useful addition to investment managers in an era where asset prices have become distorted by quantitative easing. In the current low or negative interest rate environment (especially in Europe), cash deposits are earning poor returns such that depositors are often not being paid for the credit risk they are assuming with the deposit bank. Structured deposits therefore represent an alternative to achieve potentially higher rates of return without putting your capital at risk.
Bespoke structures can offer you the potential for increased returns on the upside, or improved downside protection without having to hold the physical assets directly. They are also simpler and more transparent than hedge funds or absolute return funds, whose performance and strategies can be very widely dispersed. In short, structured products offer diversification and hedging benefits that can be tailor made to your portfolio. Many investors use these products to help reduce volatility across their traditional portfolio.
Structured deposits are deposited in the ordinary way with a bank and last a set period of time (often five or six years); however, low fixed rates of return are exchanged for a variable, but potentially higher rate of return. Although the capital ranks as a deposit and has the same safety, it differs from an ordinary bank deposit in that the return is based on the performance of an underlying asset such as an equity index, bond price or other financial instruments.
If the investment does not perform, you may get no interest at all. However, you will receive back all of your capital. Structured deposits are therefore higher risk investments than a standard savings/bank account. If the underlying bank or counterparty fails, you may lose some or all of your capital – this is the same as a standard bank account.
The products can be set up to meet growth or income objectives and liquidity options can be built-in if required. The maturity length can be set, just as with a fixed-term bank account. Generally speaking, the longer the term, the higher the potential returns.
Structured products are commonly offered by large insurance companies and investment banks. Your money is typically used to buy two underlying investments, one to protect your capital (typically a zero coupon bond issued by the provider) and another (an option) which provides the bonus or coupon. These are higher risk investments than a structured deposit as your capital is at risk. Structured products are normally created as senior unsecured debt, a type of corporate bond.
At the outset, the client decides how much capital they wish to put at risk e.g. 5% at risk, or a 95% capital guarantee. The return you receive depends on how the stock market index, bond index or other measure performs – you can choose from a vast array of underlying investments on which to base the performance. These should be tailored to your attitude to risk.
You may choose to receive growth, income or both from a product. Liquidity options can be built-in to the product to allow early encashment or to create a stop-loss. The potential returns increase the greater the amount of capital is put at risk, and the longer the maturity. However, there are other factors such as volatility and interest rates that affect day to day pricing.
If the investment fails to perform, or the product provider fails you may lose some or all of your capital.
Other products may let you take a regular income e.g. 4% per annum, but the capital may depend on the final value of an equity index at the end of the product.