With investors continuing to consider alternative investments in their portfolios, the structured product space has flourished. Our mission is to provide you with a useful framework in which to assess the new product offerings.
Capital protected products remain the most popular choice for investors as the downside risks are quantifiable. We have covered the popular products in our past newsletters and we continue to up date our reviews in our “At a Glance” comparison table.
Structured Products have continued to evolve with providers focusing on investors primary needs of flexibility, income and protected leverage.
Warrants are a central feature of a number of the emerging products. For those investors unfamiliar with Warrants, I have found it easier to think of them as a structured product investment wrapper.
What is the attraction?
Questions to ask when
1. Are they (ASX) listed or unlisted?
2. Is there any capital protection?
3. Am I getting leveraged gains/ losses?
4. Is there a fixed return/income?
5. Is there an overriding contingent criteria to receiving the return?
The main benefit within Warrants is that investors retain beneficial ownership over the underlying investments which entitles them to franking credits and dividends.
The recent return of investor confidence in the markets coupled with the low cost of options has allowed providers to structure Warrants offering leverage to investors such as SMSFs.
Investors should note that the underlying investment can offer a whole range of features such as providing a fixed income, linking the returns to the performance of a single or basket of shares, some level of capital protection or even a leveraged return.
Our view is that Warrants are not something to be afraid of but investors should make sure they do their due diligence in understanding what and why, while some products can provide a protected investment amount, such as Self Funded Instalment Warrants, Warrants can also contain options to provide leverage to market movements.
Westpac Self Funded Instalments (SFI’s) Launched
We have featured SFIs in this issue as a strategy for rising markets. SFIs have been a popular strategy amongst SMSFs looking to leverage their equity exposure. the high cost of protection due to elevated volatility made SFIs expensive and unviable. The recent drop in market volatility has reduced the cost of protection and SFIs are likely to experience a resurgence. We will not be surprised to see a relaunch from the other major banks over the coming months.
Income Focused Products
There have been a number of products such as Alpha Results (Income) Series, UBS Perles, UBS Goals and JB Global Income Generator launched over the last 12 months. These offer investors an enhanced fixed income for a fixed term and a return of capital provided one of the shares in the reference basket does not fall by more than the barrier (typically 25%-40% below the starting price). With the baskets typically made up of a handful of blue chip shares, investors looking for enhanced income have viewed a barrier event unlikely.
We expect to see a number of variations on this theme as income generation continues to be highly desirable to investors.