Structured products have gained significant traction in the investment world, offering unique risk-return profiles that traditional asset classes cannot always provide. However, they are often misunderstood, leading to misconceptions that deter investors from considering them.
In this educational series, we’ll break down what structured products are, debunk some common myths, explore how they can enhance investment portfolios, and dive deeper into some of the new, innovative types of structured products offered and issued by Anadara.
What are Structured Investments?
Structured investments are pre-packaged investments that combine traditional assets, such as stocks or bonds, with derivatives. These products are designed to achieve specific investment objectives, such as capital protection, enhanced returns, or exposure to alternative asset classes. They can be customised to suit different risk appetites and market conditions, making them a versatile tool for investors.
The value of a structured product is derived from its underlying components, which often include a fixed income element, such as a bond to provide stability, and a derivative component, such an an option, to provide upside potential or downside protection. Common types of structured products include:
Principal Protected Notes – These offer capital protection with exposure to market-linked returns. These products may be considered by investors looking for a higher yield than possible with fixed interest products, like bonds, without sacrificing capital protection.
Yield Enhancement Investments – These provide higher potential returns in exchange for accepting certain risks, which may include risking some of your principal investment. Yields can fixed and paid regularly over the investment term, or paid at maturity based on the performance of an underlying asset.
Leveraged Investments – Leveraged products generally track the performance of an index, commodity, single stock, or basket of assets. Leveraged investments may be used by investors with a higher risk tolerance, and some leveraged products can be structured in a tax-effective manner.
Structured Investment Myths
Despite their benefits, structured investments are often misunderstood. Structured investments got a bad wrap globally in the aftermath of the global financial crisis (GFC), as many product issuers had highly leveraged investments in the market at the time the GFC commenced, leaving investors in these investments with almost no chance of a return, but obliged to continue making payments to the issuer.
Most structured investment issuers have learned a lot since the GFC, and Anadara does not issue investments that require ongoing payments from investors. Here are some of the common myths and the truths behind structured investments:
- Myth 1: Structured investments are too complex – While structured investments may seem complicated due to their combination of derivatives and fixed income, their mechanics are well-documented and transparent. With the right guidance, investors can understand how the payoff structures work and how they align with their investment goals.
- Myth 2: Structured investments are only for institutional investors – Structured investments were initially popular among institutional investors, but today, many financial institutions offer them to retail investors. There are products tailored for various levels of risk tolerance and investment amounts, making them accessible to a much broader audience.
- Myth 3: Structured investments are riskier than traditional investments – Like all investments, structured investments come with risks. However, many structured investments, such as principal-protected notes, are designed to minimise downside risk while still offering market-linked returns. The level of risk depends on the structure and underlying assets.
- Myth 4: Structured investments lack liquidity – While some structured investments have limited secondary market liquidity, many are tradable, and some investments may offer early redemption options. Additionally, their defined maturities allow investors to plan their investment horizons accordingly.
Structured investments as part of a portfolio
Structured investments can be valuable when used strategically as a part of a broader investment portfolio. Here’s how they can be incorporated:
Enhancing Yield
For investors seeking higher returns, structured investments with yield-enhancing features can provide attractive income potential compared to traditional fixed-income instruments.
Risk Management
Capital-protected structured investments can help conservative investors gain exposure to equity markets while preserving their principal, thus managing downside risk.
Diversification
Structured investments allow investors to gain exposure to asset classes or investment themes that may not be easily accessible through traditional means, improving portfolio diversification.
Customisation
Since structured investments can be tailored to specific market views and risk preferences, investors can fine-tune their portfolios to align with their financial goals and outlook.
Structured investments offer a compelling blend of customisation, risk management, and return enhancement opportunities. While they may seem complex at first, understanding their structure and potential benefits can help investors make informed decisions. By debunking myths and recognising their strategic value, investors can use structured products to complement their broader investment portfolios effectively.
A new part of this educational series will be released on a weekly basis, where we will look at each of the types of structured investments Anadara offers and their respective risks vs potential returns. Each part in this series will also look at the underlying financial instruments used for each type of structured investment, providing a kind of transparency around structured investments that can be hard to find.
The first part in this series is available now; Principal Protected Notes.
Please get in touch with us to discuss how structured investments can fit into your portfolio, or if you’re an adviser, ask us about our white label offering, where we can create a product specific to your views of the market, for you to offer to your investors. And if you would like to book a time to speak to one of our advisors about structured investments, please book a time to speak to one of our Advisors:
And as with any financial product, understanding the structure and potential payoff scenarios is key to making an informed decision. We highly recommend that investors speak to their professional adviser before choosing to invest in any of the structured investments offered by Anadara.
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