Structured products (SPs) have come to the fore as a key asset class for wealth managers and intermediaries. Managed correctly, these products are providing the performance and portfolio protection that many professional advisers and their clients are looking for.
SPs are built to provide a defined return over a fixed period and, importantly, to offer the potential for a positive return in rising, flat or falling markets. Compared to investing in equities, bonds or collective investments, SPs can provide a strong alternative risk/reward investment profile and true diversification for client portfolios.
This has become particularly acute given today’s uncertain, volatile market environment: many investors have decided to look beyond mainstream asset classes and alternative investments, such as SPs, are rising in popularity. The fact that SPs are able to be managed in an ISA/SIPP wrapper is testament to the growing use of them as investment tools.
Since diversification in private client portfolios is important, SPs can be a very useful part of a wider portfolio for those willing to do the work.
Importantly, there is also value in constructing a defined portfolio of SPs rather than just owning one or two until they expire, which is often the route chosen by many investors. This portfolio approach allows for appropriate diversification of risk and it is absolutely key to adopt an active rather than passive trading strategy when running a portfolio of SPs as, contrary to popular perception, SPs are not simply ‘buy and hold’ investments.
In order to manage risk appropriately, it is also important to trade with banks who are not only highly rated from a credit perspective but can provide a liquid secondary market. There are various parameters which will impact the price of an SP at any given time and being aware of these parameters and how they can change over time is again crucial in order to minimise risk and maximise returns.
SPs have had their detractors due to their complexity but they have in the most part continued to deliver returns in all types of market conditions. Our experience suggests that the popularity of SPs continues to increase.
In order to help manage the associated risks with these assets, we believe investors should consider the use of SP portfolios. Ideally, these portfolios should be managed by a dedicated specialist team with a notable level of experience and knowledge of derivatives and bank credit, the two key components of any structured product.