Other than building a wealth portfolio that is heavily invested in cash or safe haven assets, a savvy investor may wish to consider equity-linked structured products which are yield-accretive and can help to weatherproof your portfolio.
T he treasury products team at Maybank Group Wealth Management helps you make sense of the main features of structured products.
What is a structured product?
A structured product, also known as a market-linked investment, is a structured finance investment instrument based on underlying assets or benchmarks that may include equities, market indices, fixed-income products, foreign exchange rates, commodities prices or a mix of these.
In a volatile economy, adding structured products to a wealth portfolio can be beneficial for risk diversification. Some investors might associate weatherproofing with hedging and the immediate thought of trading complex derivatives comes to mind.
However, there is a subtle difference between the two. The idea of weatherproofing is never about making big changes but to make minor adjustments to existing investment decisions with the aim of making a portfolio resilient.
What is the entry point and holding period?
Structured products are short to long-term investments that cater to accredited investors with an investible sum of S$100,000 or equivalent, as well as retail investors who fulfill the minimum investment amount of S$200,000 or equivalent. The investment horizon can be as short as one month or up to five years. Structured products distribute either conditional or fixed-income coupon.
The risk level of a structured product depends on the structure and its underlying assets. For structured products that return 100% of the amount invested, the risk rating ranges from 1 (lowest) to 2, while the non-principal-guaranteed structured products may receive a risk rating of 5 (highest). Redeeming your investment before maturity may not be possible or could come with substantial cost.
What are the protective features?
Structured products often offer investors potential returns that are higher than the interest rates offered on traditional deposits, and investors could even make a capital gain. The potential returns depend on the performance of the underlying assets or benchmarks which would subject a structured product investor to more risks than what a traditional depositor is exposed to.
For principal-at-risk structures, the investor takes physical delivery of the worst-performing underlying asset at a paper loss if any of the underlying assets in the equity basket underperforms.
Physical delivery is a term in an options or futures contract which requires the actual underlying asset to be delivered upon the specified delivery date, rather than being traded out with offsetting contracts.
Investors can weatherproof their portfolio by reducing the probability of physical delivery through the inclusion of protective features like the "ninja" and "glider" barriers when they invest in structured products.
- A ninja barrier feature provides additional protection for normal fixed coupon notes. Should all underlying assets perform above the ninja barrier at a point in time (which is usually at the midpoint of a structured product's tenor), the product will return 100% of the investment amount at maturity regardless of the performance of the underlying assets. In the meantime, investors continue to enjoy fixed coupons until maturity or until the "knock out" occurs. A knock-out option is an option with a built-in mechanism to expire worthless if a specified price level in the underlying asset is reached.
- Glider barriers insulate the investor's portfolio by allowing the underlying asset prices to slowly glide downwards. Such gliders are usually overlaid with step-down auto-callable structures that pay a conditional coupon only upon the occurrence of early redemption. The automatic call feature on pre-prescribed dates in a structured product is known as the auto-call dates. The knock-out or auto-call levels typically decrease with each observation period. Should the underlying assets close above the glider barrier at the end of the glider period, the structure can be redeemed early and a conditional coupon is paid. The benefits are two-pronged with investors enjoying a high probability of receiving conditional coupons and the option to exit an investment without incurring a loss in a downward-trending market .
It is important to note that the ninja and glider features may reduce but do not eliminate risks, therefore investors are still at risk of potentially facing physical delivery as well as being exposed to the credit risks of the issuer and liquidity risks.