Structured Product  

The case for structured products

This article is part of
Guide to structured products

The case for structured products

Diversifying between different vehicles, asset types, funds and sectors is a universal approach used by intermediaries.

This ensures the performance of a client’s portfolio is spread far and wide, thus reducing risk.

It also means that some assets can stabilise others in the case of a market downturn.

In terms of long-term investments – and putting pensions to one side - advisers have generally favoured open-ended investment companies, investment bonds, and historically unit trusts.

As intermediaries know all too well, these offer a selection of equities, bonds and property, the proportions of which can be tailored to meet an individual’s objectives and importantly attitude to risk.

Unlike structured products, there are no promises or guarantees made to either pay a certain level of income, or repay the initial capital, although some investment bonds sold in the 1990s attached a guaranteed return of capital on the investor’s tenth anniversary of holding the bond.

Need for structured products

Advocates of structured products makes the case that, instead of advisers using them in favour of Oeics, bonds or unit trusts, they could be used to complement them within a client’s portfolio.

This could be a particularly useful strategy over the next 10 years or so, according to Mr Taylor, who says that in a low return environment, advisers and investors need to consider their options, recognising that it was relatively easy to make strong positive returns over the last decade.

But that looks set to be far more challenging in the future.

Chris Taylor, global head of structured products at Tempo says: “The ‘alpha by contract’ which structured products offer is highly compelling as an investment option, at a time when advisers and investors are considering a low return outlook ahead.

"And many increasingly recognise that alpha by fund management comes with a number of important considerations of its own, including being difficult to identify in advance, expensive to buy, and generally unreliable in the long term, in terms of not often being consistently repeatable.”

He goes further to add: “It is also interesting to consider that structured products allow an investor to delegate the investment process risk to the investment bank, who must deliver the terms of the bonds which they issue, regardless of what they do or don’t do, if they are solvent at maturity.

Market challenges

Again with reference to a low returns environment, at a time when advisers and investors are increasingly concerned about the challenges of the environment ahead, including structured products in a portfolio can help better diversify and balance a portfolio, in terms of the types of investments, for example, active, passive, smart beta and structured products.”