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At a time of high investor uncertainty about the prospects for both economies and markets, it is quite understandable that the opportunity of a “heads you win, tails you don’t lose” proposition would carry appeal.

Hence the recent focus on structured products by many investment banks. This term covers an increasingly wide range of investment options; some offer capital protection - the prospect of initial capital being repaid, no matter what happens to markets - while others offer either no formal protection at all or conditional protection, dependent on certain, lower, market levels not being breached.

In the past few months it has become clear there has been increased merit in considering this concept for portfolios, especially for clients whose risk aversion is higher than average, but who on balance are not willing to forgo very much of the returns expected from an equity-orientated mandate. The comfort of capital protection does of course only apply at the end of the product’s lifetime, so it is critical to the use of structured products to know the time horizon for the life of the investment, as well as the index or basket of assets to which any product’s returns are linked.

Historical evidence reveals the protection element of structured products is needed less the longer the investment timescale. Out of 58 discrete five-year intervals, only four have failed to provide an increase in UK stock market index values, allowing for reinvested income. If one has a shorter timeframe, one can take much less comfort from the use of structured products. Recent investors in FTSE-linked structured products have had very little cushion from the volatility of emotion that has pervaded stock markets in the past few months. Those hoping to have found resilience against market uncertainty in the short term will have been disappointed.

The more appealing end of structured products is in the area where more traditional portfolio exposure is difficult to achieve. Last year, we were very taken by the potential for a marked rise in the price of a number of commodities due to the burgeoning demand from emerging markets. It was not straightforward to find an easy way of gaining exposure to this volatile area for investment, but there were several structured products that provided access. One we liked was the BNP Harewood Energy Base Metals fund. This provided enhanced upside of a basket of energy and metal prices, while offering a capital preservation option in the event of no eventual appreciation of the basket.

As the above example shows, structured products do not have to be linked to equity indices. Baskets of commodities, bond indices and even commercial property values can be accessed. All are potential sources of decent total returns, superior to those likely to be obtained from cash and bond markets, but without the likely volatility exhibited by equities. They can be blended together in proportions designed to deliver an efficient frontier – asset allocation which captures the optimal range of asset classes, mixed in such a way as to deliver the most appropriate combination of return and volatility.

Chris Hills is chief investment officer at Rensburg Sheppards Investment Management