There are many advantages to structured products. Whilst the specific benefits of structured products will depend on an individual’s specific circumstances, the general advantages can be summarised as follows:
Defined Investment ReturnsThe nature of a structured product means that the investor will know from the outset what return they will receive at the end of the investment term (or earlier, if the structured product has a ‘kick out’ or ‘autocall’ feature). The certainty, and defined nature of the investment return has been a very popular feature of structured products for investors who are concerned about how the volatility of the stock market can affect the value of their investment portfolios.
Capital ProtectionWith most structured products, there is a level of capital protection built into the investment, so that an investor will get their capital back in full, subject to any barrier not being breached, and the issuer remaining solvent. A typical ‘protection barrier’ currently seen in structured products is 50% – which means that provided the underlying asset or reference index remains above 50% of the starting level, the investor will get 100% of his capital back. This can be a significant benefit in a bear market – if an investor had invested in a long only UK equities fund, then if the FTSE falls 25%, he would lose 25% of his capital. Whereas if he had invested in a structured product with a 50% protection barrier, then he would still get 100% of his initial capital back, in addition to any income which the product paid.
Structured Products can Generate Positive Returns in Flat or Bear MarketsIn addition to the capital protection offered above, some structured products will also deliver an investment return even when the markets are down. For example, a product will payout a 40% gain at the end of the product term provided that the reference index has not fallen by more than 25% at maturity.
Structured Products Can Offer Leverage ReturnsSome products are structured so that they offer returns which are twice the rise of a particular index, for example. This can be a very useful addition to a portfolio in flat markets to generate increased investment returns.
Structured Products can Assist Portfolio ManagementBecause structured products have a predefined return, they can greatly help to diversify a portfoli and help to partially offset the uncertainty inherent in a long only equity portfolio.
Tax Planning AdvantagesFor some investors, there may be tax planning advantages of investing in structured products. Because of the defined nature of the returns, investments can be planned in a way to maximise the tax payer’s individual capital tax exemptions in the years in which the investments are due to mature. Thus an investor can invest in products with differing maturity dates, and in amounts to fully utilise each year’s CGT exemption.
For more information about Structured Products, please contact us.