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Structured notes

By Paul Beckwith features@algarveresident.com

Paul Beckwith is an International Financial Advisor working with Blacktower

Financial Management (International) Limited

What is a structured note?

A structured note is a good way of receiving higher returns in times when the interest rates are low. A structured note is an investment that includes several financial products, typically a stock or bond plus a derivative.

A derivative is a contract between two parties that specifies conditions (especially the dates, resulting values of the underlying investments, and notional amounts) under which payments are to be made between the parties.

A simple example would be a five-year bond tied together with an option contract. The addition of the option contract changes the security’s risk/return profile to make it more tailored to an investor’s comfort zone. This makes it possible to invest in an asset class that would otherwise be considered too risky. A structured note is a good addition to a portfolio particularly when deposit returns are low.

How does it work?

A structured note combines two elements: a bond (that protects your capital) makes up most of the investment (typically 80%), and the rest of your money is put into a derivative.

Because the investment bond element in structured notes can be designed to give a return that equals your initial investment, your capital will be protected. And the derivative element offers you the potential to achieve higher returns when compared with a standard deposit.

Structured note terms are generally between 12 months and six years and it is important that you can afford to tie up your money for that period, because your capital is only protected when structured notes are held for their full term.

Investment companies regularly launch new structured products that take advantage of current market conditions. This ensures that structured notes available to us are always competitive and provide you with the opportunity to benefit in changing markets.

Structured note examples

For example, you could choose a two year 100% capital protected structured note linked to gold, available in US dollars, euros or sterling. At maturity, the investor receives 100% of the capital investment, and has the potential to get higher returns subject to the favourable movement in the price of gold over the two-year term.

Another option could be a one year structured note in sterling, euros or dollars which pays a fixed income of 9% per annum (quarterly at 2.25%).

How this investment works

This investment is linked to the stock performance of four energy companies. This is designed to provide a quarterly return to investors while also offering an attractive level of capital protection provided that on the Final Valuation Date, none of the underlying stocks close at below 50% of their value.

In the event that one or more of the underlying stocks closes below their 50% barrier levels on the Final Valuation Date, the investors capital to be returned on the Redemption Date will be reduced on a one for one basis in line with the percentage decline in the worst performing stock’s value, below the 50% barrier.

Structured notes are innovative and flexible investment products that suit a wide range of investors (see below).

• Investors who want to diversify their portfolio with lower risk products that protect their capital and still offer the opportunity to realise higher rewards than a standard Time Deposit.

• Those who want the chance to invest in high-risk securities they wouldn’t consider direct investment into, such as equities or commodities.

• Investors who can lock away their money for the term of the particular structured note.

• Those who can meet the minimum investment criteria to invest in a structured note.

• Those who accept only receiving back the initial amount invested, if the derivative element of the structured note does not perform.

• Those that accept receiving less than the initial amount invested , if the derivative element of the structured note does not perform.

Structured Notes are not suitable for everyone. Should the Issuer and/or the Guarantor become insolvent or fail in any other way, you may not receive back any of your investment monies, not even the initial investment amount as the capital protection will not apply in this situation. Payment of capital, interest or any other amounts due under notes are not protected by the UK Financial Services Compensation Scheme Limited. Notes are not designed to be liquid and investors should intend to hold their Notes until maturity. Notes may have no established trading market or a trading market that is not very liquid. Therefore investors should be aware that they may not be able to sell their Notes easily or at prices that would provide them with a comparable yield to similar investments that have a developed secondary market.

This facility is not suitable for all expatriates, and we recommend that advice is sought before one makes any commitment. As an Independent Financial Adviser, Blacktower seeks to ensure that our clients receive the advice suitable for their specific circumstances. Please contact us for further details 289 355 685.

Blacktower Group has offices in the United Kingdom, Gibraltar, Portugal, Spain, France and Italy. Blacktower Financial Management (International) Ltd is licensed in Gibraltar by the Financial Services Commission (FSC) License No. 00805B Blacktower Financial Management Ltd is Authorised and Regulated in the UK by the Financial Services Authority.