If you can mitigate loss, clients may be more forthcoming

This article is part of
Structured products - January 2013

There’s an old investment analogy about monkeys that highlights the deeply engrained investment behaviour that affects how we feel about investments, as noted in Jason Zweig’s Your Money And Your Brain.

Say there is a group of monkeys – one trainer feeds them a banana every hour and half the time gives them two. A second trainer gives them two bananas from the outset but half the time takes one away. Even though the two trainers dispense the same amount of bananas, the monkeys flock to the first trainer - why? Because the experience of having something taken away is one nobody likes. Clients can think about investments in the same way – would they rather have the possibility of more upside or greater certainty of no loss?

The investment world is now more than ever characterised by uncertainty. With crises and sovereign debt dramas affecting various markets, investors are nervous about committing their capital. It is in times such as these that structured investments can come into their own, by allowing clients to balance capital protection against potential upside gains in a way that suits them.

As with any type of investment product, the best place to start when examining what kind of structured investment is most suitable, is to determine a client’s attitude to risk. Are they bullish that the market will rise from here? Or are they more concerned with losing money (or bananas)? This will help to determine if it is a structured deposit product they are seeking or one with more upside potential and correspondingly greater risk – a structured-capital-at-risk product.

Aiming to preserve capital is one of the most attractive aspects of structured investments, and it is one that hasn’t gone unrecognised by the open-ended funds industry as evidenced by the spate of absolute return fund launches. However, unlike absolute return funds, investors in structured investments are better able to see what is coming and to know if their capital will remain intact.

While no investment can offer complete certainty, structured investments can give clients more control over the sort of outcomes they face than more traditional investment options. Not only can clients plan for forthcoming needs, like school fees, but tax planning using structures may be easier than using a long-only fund.

Also, now is a good time to be looking at structured investments due to the advancements within the industry. Greater transparency, liquidity and access to information have eased many past concerns about the construction and promotion of structured investments.

There are plenty of reasons for clients to be hesitant regarding investments right now. But as the monkeys illustrate if you can mitigate the possibility of loss, then your clients may be more forthcoming; structured investments can help with that.

Richard Henry is director of investor solutions at Barclays Capital