When we asked to the team of Privatam – WealthTech headquatered in Monaco – to communicate their expertise on structured products, they came up with a series of posts.


Myths And Realities About Structured Products

While some investors might be shocked about someone choosing to invest in the Austrian century bonds, let us remember that :

Granted, investment choices are not always mutually exclusive and a healthy portfolio will contain diversified assets in terms of their risk profiles. Still, one might not be willing to invest in Apple shares because:

  • He needs a higher income as the one offered by the Apple’s dividend yield
  • He is a Europe-based investor, with expenses in Euros and cannot afford to be exposed to FX swings
  • While he thinks Apple is a great company, he also views its shares as fairly valued, with limited mid-term upside potential

At the same time, he might be extremely reluctant to invest in the Austrian bonds which:

  • Yield a meager return of less than 1% pa
  • Given their 100 years maturity, have a modified duration of over 50, meaning the bond would lose 50% of its value for each 1% of rates increase
  • Pose a high interest rate sensitivity in the context of record low yields and rising inflation

What if we could create a product that:

  • Pays a guaranteed yield of 5% pa, every 3 months
  • Has a pre-defined maturity of 12 months
  • Is denominated in Euros
  • Is linked to shares of Apple and will return 100% of the invested capital at maturity as long as the stock has not fallen by more than 30% from today’s level. Should Apple fall by more than 30%, than investors would incur into the same loss

We might just have an interesting solution in your hands!

Myths And Realities About Structured Products

Why:

  • Because the investor needed income and this solution yields 5% pa
  • Because the investor thinks Apple is a great company and, even if he thinks upside is limited, he sees the likelihood of the shares dropping by over 30% as remote
  • Because the investor can only invest in Euros and this solution strips out the currency risk, even if Apple is a share quoted in Dollars

As before, this solution will please many but not all. Some investors will want longer maturities. Some will need a higher yield. Some will prefer a larger protection buffer, etc.

The beauty of structured products is just that: they can be tailored to virtually any need and can transform an asset into something quite different. In this case, we transformed a stock into a bond-like instrument and changed its currency.

Perhaps a good way to learn more about structured products would be to bust some of the myths which surround them.

Article: Arthur Bauch – co-founder PrivatamMyths & Realities about structured products