Features to look for in a structured product

STRUCTURED products have become increasingly popular in an increasingly volatile and uncertain world. Investors want to preserve their capital, but they also want decent returns that track or beat inflation. They also want transparency, particularly around costs, tax and potential returns.

Many structured products fit the bill, providing capital protection and geared returns in an uncertain economic climate. However, with an array of offerings out there and each one with its own features, it’s often difficult to discern whether an offering is right for a particular investor’s needs.

The concepts and terminology can also be daunting for investors, discouraging them from including what should be a useful tool in their portfolio. However, armed with some key basic knowledge, investors should be able to choose an investment that suits their needs. ◆

Geared returns.

◆ This means investors earn a multiple of the return of the underlying index or group of indices. The underlying returns are often capped at a certain level, but investors will still earn the multiple up to that level at which the underlying return is capped.

For example, the investment may give the investor two times the return of the underlying index, capped at 60 percent. So if the index grows by 20 percent over five years, the investor will earn a 40 percent return. If the index grows by more than the 60 percent cap, the investor will earn a maximum of 120 percent (the 60 percent times two). Only if the index returns more than 120 percent will the investor lose out on the upside beyond that level. Such gearing is thus useful for investors who are only mildly bullish about the underlying index. It’s important to note that the geared returns are linked to a price-only index, and investors forfeit their dividends by not investing in the index directly.

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Returns can be in rand or a foreign currency.

It’s important to look at the currency to which the investment is linked. Structured products will often link returns to a wellknown stock market index, such as the S&P 500, FTSE 100 or Nikkei. Others will be linked to a group of indices. But some will offer the return in dollars, euros or sterling, while for others the returns will be in rand. Investors will choose which one they want, depending on how much rand or foreign currency exposure they want. | Supplied by Investec

So what should investors look out for when considering a structured product? As noted above, each structured product is different, but most share the following features, which could influence their decision:Capital protection. Capital protection is probably the best-known feature of structured products. A typical structured product (usually with a maturity of between three and five years), may have 100 percent capital protection, ranging from 100 percent or perhaps a certain percentage (say, 20 percent or 30 percent). This feature is attractive for investors concerned about stock market returns over the medium term.