What is a Structured Product?
A structured product is a pre-packed investment strategy that manages risk by exposing the investor to a mix of equity indices, a basket of stocks, currencies, interest rates and commodities.
The investor’s required capital protection is one element which effectively determine the structured product. Another is the derivative which links the investment with an underlying index, a currency or a basket of securities.
A well-diversified portfolio will benefit highly from the introduction of structured products as they can add significant value when they fit within the overall strategy of the investor. Additionally, these products can also work to enable access to different assets classes in private client portfolios.
Usually, Wealth Managers will present the idea of an investor opting for a structured product instead of a bond.
Q. If a structured product can go down in price because it is linked to an underlying index, or because of its bond content/volatility shifts, where should structured products be placed in client valuations?
A. Some believe structured products should come under a separate section in a client valuation, but when using them in a portfolio, they can be used to replace fixed income or equities.
Q. How are structured products classified by companies? If a client holds a structured note instead of US equities, is it listed under US equities?
A. Structured Products allow clients to access other asset classes, hence the term derivative, making them difficult to classify. But, with that being said, they are usually placed into valuations based on underlying exposure.
Naturally, being aware of risks is necessary and there are some underlying ones related to structured notes. For example, exposure to one institution can add up across a range of structured products with potential cross-over with fixed income.
Structured Products work to ensure that the investor is not exposed to concentrated counterparty risk – thanks to new types of products coming on the market. A new breed of structured Ucits funds hold a range of structured products, rather than being based on one autocall. This type of fund, based on a range of products, means providers can reduce the amount they have in collateral gilts, so they have more opportunity to generate returns than a typical Ucits III offering. There is also no exit date, because the product is continuously being rolled forward.