WHAT ARE STRUCTURED PRODUCTS

Structured products are simply financial instruments issued by banks with varying terms, payouts and risk profiles tracking the performance of an underlying asset which can be equity, index, commodity, currency or a basket. There are no standardized structured products, the terms, payout and risk profile of each instrument is bespoke and determined at the time of issue by the issuing bank. It is therefore important for investors to understand what a particular product will do and how it will behave if certain conditions are met, before investing.

STRUCTURED PRODUCTS OFFER EXPOSURE TO A DIVERSE RANGE OF MARKETS AND UNDERLYING ASSETS

  • Shares of major companies like Anglo American, Barclays,
    BHP Billiton, Marks & Spencer and Tesco
  • Indices such as FTSE, Dow Jones, S&P and Nikkei
  • Baskets of stocks offering access to groups of equities based
    on particular market sectors
  • Interest rates and inflation using benchmarks such as CPI, RPI and LIBOR
  • Commodities including precious metals like platinum, gold, silver
    as well as agricultural commodities and oil
  • Exchange rates for various currencies

ADVANTAGES
OF STRUCTURED PRODUCTS

Structured products offer exposure to a wide range of markets with varying features and product structures. The large diversity of terms, payout schedules and risk profiles in structured products demonstrates one of the key benefits of these products – they offer investors precision in constructing investment portfolios to suit specific investment strategies. Structured products offer a range of possibilities allowing investors to tailor their exposure to various markets and the potential to make a return in all types of market conditions, with products which respond to falling or rising markets in periods of high or low volatility.

For example, if an investor wants to include ABC plc in his portfolio, he may purchase ABC plc shares. But in uncertain market conditions, this investor’s appetite for risk is low and he wants some sort of capital protection. So instead of buying ordinary shares, he can invest in a structured product instrument where the underlying asset is ABC plc shares and incorporates a capital protection mechanism.

Some investors with a larger appetite for risk and return may invest in structured products which offer geared performance rather than capital protection.

Structured products are truly flexible and can be tailored to meet individual investment needs. When choosing structured product, investors should consider what features are required and avoid ones that are unnecessary as each feature may represent additional cost and complexity.

Investors must also bear in mind that if they chose to invest in structured products instead of directly in shares, they forgo dividend payments and the entitlements which commonly accompany shares such as voting rights.