In recent weeks there has been a BOOM of investment into Structured Products again (often referred to as Structured Notes).
Is it because many people across the world suddenly woke up one morning and decided to change their investment strategy??
Well, YES is the obvious answer! But why did they?
In this article I hope to explain
- Why some investors don’t use Structured Notes
- Why people have chosen not to use them in recent years
- What has caused the sudden increase in investment again
What is a Structured Product?
A structured product is generally a pre-packaged investment strategy involving financial derivatives, a single security or a basket of securities, options, indices, commodities, debt issuances and/or foreign currencies, and to a lesser extent, swaps. The variety of products just described is demonstrative of the fact that there is no single, uniform definition of a structured product.
These products are created through the process of financial engineering, i.e., by combining underlying like shares, bonds, indices or commodities with derivatives. The value of derivative securities, such as options, forwards and swaps, is determined by (respectively, derives from) the prices of the underlying securities.
Why doesn’t everyone use Structured Notes?
TOO COMPLEX – Structured Notes come in a Billion different designs. There is no standard description of how a Structured Product works as most differ. Some investors simply cannot understand how they work, and we at NEBA would suggest nobody should invest in something they don’t understand!
DIDN’T WORK – Some investors have invested in Structured Notes and lost money in the past. Does this mean that they are “risky” investments? Of course not! That is like asking if all Mutual Funds / Unit Trusts are risky. Some are, some are not. It all depends on the individual investment. In fact, some Structured Products are the safest investments out there.
THINK THEY CAN DO BETTER – Lastly, some people choose not to invest because they feel they can beat the potential returns of a “safe” Structured Note via other types of investments they are more familiar with. The flip side is just the opposite for some investors who find certain Structures; like Fixed Income or Coupon Triggers simpler to understand, more reliable returns as they don’t have time to watch the Markets 24/7 or search thousands of Mutual Funds to find potentially “Better Returns” elsewhere.
Why have people not been using them in recent years?
So if Structured Notes can be “Safe Investments”, why have many investors chosen not to invest in them in recent years?
This comes down to the way in which they are built, and how the return (or coupon) is Funded that made them less attractive than other investments.
1. Low interest rates in the UK, USA and EU over the past few years has meant that there has been less Funding to support higher Coupons (or returns)
2. Low volatility in the Market and a general Bull Market has affected potential coupons. When there is volatility, investors get scared and don’t invest. Therefore Banks offer higher rates to investors to encourage the continued flow of cash into the financial system (and to protect their balance sheets and credit rating).
Why are Investors using them now?
Factors like the recent War in Ukraine, higher inflation, interest rate hikes in the USA and UK help create coupons (interest payments) that are higher than before. If you pair these facts with recent drops in Stock Markets like the S&P 500 (nervousness and volatility, this gives an excellent entry point for investors and increased protection.
As the vast majority of Structured Notes NEBA clients use have market downside protection, investors who once took advantage of the decade long ‘Bull Market’ (and who are now concerned about the future) moved their positions to defensive using Structured Products.
Key Benefits of Structured Products
- Growth: Potential for enhancing yield.
- Flexibility: Varied investment options for different investment appetites: Choice Stocks, Indices, Sectors, Currencies and Commodities.
- Accessible: Daily tradable (buy/sell any time).
- Cost Effective: Clients are invested at 100% & no annual management charges
- Protection: Protection of Capital in a falling Market
