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 Privatam – Myths & Realities about structured products
