Chris Taylor, global head of structured products at Tempo, says another key feature of structured products is that firms have a contract to keep their promises:
“Structured products offer investment strategies which can do things that neither active nor passive fund management can do, in particular this includes the ability to generate positive returns from a flat or even falling market, with a defined level of protection from market falls, and to do so ‘by contract’," Mr Taylor adds.
"For example, structured products equate to investing by contract, creating a legal obligation upon the issuer to deliver the terms of the bonds which they issue, which in turn creates the counterparty risk.”
Types of structured products
Rather than being a single-functioning product in its own right, structured products come in a few different shapes and sizes.
According to Meteor Asset Management’s website, these are as follows:
- Autocalls (or kickout) are structured products which can mature prior to their scheduled maturity date, if certain predetermined market conditions have been met.
- Income products are market-linked investments that can provide an enhanced level of income.
- Growth products are market-linked investment s, which aim to return a growth payment and initial capital at maturity of the plan.
- Structured deposit plans are cash-based fixed term deposits, like fixed rate bonds, but instead of paying a fixed rate there is a variable return linked to the performance of an underlying asset.
Ian Lowes, managing director at Lowes Financial Management, offers some further detail.
He says: “Since the demise of capital ‘protected’ plans in 2015 the market can be split into two main categories: capital at risk which, year to date represent approximately 81 per cent of plans issued and deposit-based plans which make up the balance.
"As the names suggest, deposit-based plans are expected to return a minimum of the original investment at maturity and also afford Financial Services Compensation Scheme protection in the event that the deposit taker defaults, whereas the alternatives typically put capital at risk from counterparty default and market falls beyond a contingent capital protection barrier.”
He adds that the capital at risk sub-sector can be split into three main categories; growth plans, income plans and auto-call plans with the latter being dominant, representing 70 per cent of plans issued year to date.
