Why it's wrong to compare structured products with trackers

Sophie Barnett, executive member of the UK SPA, looks at how structured products can work alongside other investment types

The returns available via structured products are based on the performance of a reference asset, commonly referred to as the ‘underlying’. In the UK retail market, this is the FTSE 100 Index in the vast majority of cases, however it can be anything from a 
commodity, an interest rate, property exposure or even an inflation rate.

This allows investors to gain exposure to markets that might be difficult for retail investors to access directly. By diversifying exposure across a range of different (and often un-correlated) markets, investors open up more opportunities to generate returns and hedge losses.

One of the main benefits of structured products is the fact they provide defined returns upon maturity. This can help investors to achieve particular planning objectives: not only can they use structured products with different maturities to help manage the duration of their portfolios, but products that pay fixed returns under certain market conditions can help them achieve greater stability of returns. There is no risk of manager underperformance as is the case with actively managed investments.

Part of the defined return available via structured products will be some form of capital protection. This can either be full protection, or ‘soft’ protection, which is a promise to repay capital at maturity as long as the underlying has not fallen by more than a pre-set amount.

This gives investors a simple, yet effective, tool to help manage the risk reward balance of their portfolios: yes, they will have to pay for the protection by reducing upside potential slightly, but investors with a low risk appetite can use capital protected products to limit portfolio losses in bearish markets.

Finally, structured products can prove particularly useful to investors who have uncertain or non-bullish views on an underlying asset. The range of payouts available mean investors can take almost any view: do they believe the underlying will appreciate but only by a limited amount?

A product that pays leveraged participation up to a certain cap may be appropriate here. By combining these ‘non-linear’ payout profiles with existing exposure, investors can express a particular view and achieve positive returns or yield enhancement when long only exposure would be flat or negative.