Structured Products (Video)

 

 

Structured products are a pre-packaged investment instrument designed to meet specific objectives. They can be used as an alternative to a direct investment, or as part of the asset allocation process to reduce a portfolio’s exposure to downside risk.  Structured products are not new and the derivatives used to create them can be traced back to biblical times.

With the onset of the GFC, which dramatically altered markets, structured products like many investments received a fair amount of criticism. Many investors who used structured products to gain leverage found themselves in loss-making investments, and worse, investments they were unable to get out of.

Common criticisms of structured products were that they were too risky, illiquid, too complex and not transparent.

However, structured products have changed greatly since the GFC, in response to these criticisms. The products are generally shorter duration, there is a known outcome to the investor, and people can exit the investments at regular ‘windows,’ even as frequently as every quarter.

Structured products are now commonly used as a portfolio management tool by self-managed super funds (SMSFs) to achieve a broad range of investor goals rather than only as a method of gaining leveraged tax effective exposure

It could be to increase the fund’s international exposure and thus improve its diversification, but with the accompanying downside and currency risk minimised or even eliminated; or to get this international exposure without selling domestic shares and incurring capital gains tax, while also retaining the important franking credits.

It could be to provide cost effective exposure to investments that are not readily available to retail investors in Australia, or simply to provide exposure to the stock market, while giving known downside risk.

It could be to set up ‘capital-protected’ strategies in a portfolio using term deposits, while at the same time gaining potential stock market upside, which particularly suits risk-averse investors.

Structured products are also a means to give investors exposure to ‘alternative’ investments and asset classes that can offer the portfolio ‘uncorrelated’ returns – that is, returns that don’t depend on stock market gains. In short, structured products can achieve a wide range of investment outcomes that are simply not possible with traditional assets. 

 

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