Structured product market thriving once more.jpg

Structured product market thriving once more


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Raoul Ruiz Martinez is the resident Independent Financial Adviser for Finesco Financial Services Ltd at the offices of euroFINESCOs.a. He provides financial advice to UK and European expatriates in Portugal with a high degree of client service and total confidentiality. Finesco Financial Services Ltd is authorised and regulated by the UK Financial Services Authority (FSA).

STRUCTURED PRODUCTS are fast becoming the buzzword in the financial world as investors strive to reduce risk in their portfolios. The fallout from the credit crunch has increased investors’ aversion to risk and volatility – protection of capital is the order of the day. Memories of the losses suffered during the global market downturn of 2000-03 are still lingering and structured products aim to offer the potential for cash-beating, equity-like returns but with reduced risk to capital.

Not that structured products are new. They have been around for years, and many investors have latched onto the benefits of products that protect capital. Over the past decade, the products have become more sophisticated, and in some cases more risky. But the structured product market is thriving once more – and although the British market lags the continental European arena, it is growing year on year.

At a time of high investor uncertainty about the prospects for both economies and markets, it is quite understandable that the opportunity of a ‘heads you win, tails you don’t lose’ proposition would carry appeal.

This term ‘structured product’ covers a range of investment options; some offer capital protection (the prospect of initial capital being repaid, no matter what happens to markets), while others offer either no formal protection at all or conditional protection (soft floor protection) – dependent on certain (lower) market levels not being breached. With your capital protected in some of these plans, it could be safer than putting your cash under the mattress where the only risk is that you may not get a return (at least, in theory, there is no exposure to burning mattresses where your cash could go up in smoke).

Financial obligations

In the not too distant past, many advisers would have been more concerned with the soft floor protection in the product, worrying that the markets were going to fall by more than 50 per cent, rather than worrying about the security of the asset provider which is, today, one of the first elements that should always be analysed.

Indeed, the financial crisis that has gripped markets has not escaped the structured market.

Deeply involved are the investment banks that underwrite the plans. The takeover of Bear Stearns, an American investment bank, for a fire sale value has brought the quality of the investment banks into focus with questions raised on whether all will be able to meet financial obligations at maturity.

Regardless, the increasing need to gain exposure to arcane asset classes to provide a return that will beat inflation is also providing a boost to the structured product market. Assets that make up a portfolio are no longer just property, shares (or equities) or cash. Today, private equity, commodities, infrastructure and emerging market debt make up an investor’s portfolio too in a bid to find assets that are uncorrelated to shares.

Such diversification has been proven to work. Last year, the analysts who published the 2007 Barclays Equity Gilt Study compared a diversified investment portfolio (made up of equities from developed markets, bonds, property, private equity, commodities, infrastructure, emerging market equities and emerging market debt) with one consisting of equities from developed markets only. Between 1991 and 2006 the cumulative returns between the two portfolios were much the same, but the diversified portfolio experienced far less volatility. Its returns showed a steady rise throughout the dotcom boom in the run-up to 2000, while equities enjoyed a sharp spike. Shares fell steeply between 2000 and 2003 after the technology bubble burst, while returns from the diversified portfolio were relatively flat.

Also, several structured products have been launched linked to commodities – either as a basket or individual commodities such as sugar, oil or metals platinum and gold. About 59 commodity structured products have been launched since January 2007. So those who want to get exposure to corn, heating oil, soya beans and wheat, can – and protect the downside to their capital in the event of a downturn in fortunes.

Needless to say, these products are enjoying a boom – and those at the heart of the industry reckon it will continue to thrive as advisers and investors latch onto their benefits. Yet not everyone reckons they are the answer to protecting wealth. Many advisers remain unconvinced, preferring to mix and match assets using a traditional product which is a largely successful tried and tested means of investing.

While you may be thinking that cash under the mattress or a capital protected product is the way forward, use sound and professional advice to verify whether your cash is safe in the event of a fire or a fire sale.

Raoul Ruiz Martinez is based in the Algarve office of euroFINESCOs.a. as an Investment Adviser for Finesco Financial Services Ltd., Glasgow and regulated to advise on capital investments in both the UK and Portugal. He can be contacted either by telephone on 289 561 333 or on email [email protected]

Finesco Financial Services Ltd is authorised and regulated by the Financial Services Authority (FSA). Some of the services provided are not regulated by the FSA because they are not included within the Financial Services and Markets Act 2000.