Smart Thinking... How to determine risk
Does the structured product “track” both up and down as the underlying reference investments rise and fall? Or does the product offer some level of profit lock-in, that this level of gain is also guaranteed at the end of the products term or maturity
? There are now forms of “supertracker” available that can lock-in upside and never track down.Does the product have any
nasty ‘embedded options’
that we can NOT really see or easily identify or understand? These are more exotic structured products and with interest rates being the lowest for a generation and volatility being so high providers are turning to increasingly complex products to enhance headline rates.Could these options cap the clients returns in a strongly rising market so significant underperformance was realised within the portfolio, and does the product have a ‘knockout or extinguishing option’ that terminates our client investment early if certain upside performance barriers are exceeded, often long before its actual maturity?
In this instance we would now have to find a way to get our clients funds reinvested in a strongly rising market. The product manufacturers are betting that they will not have to pay out their full dues to the client so they can offer what looks like enhanced terms for a shorter period.
SUMMARY
Intermediaries need a clearly understood process for classifying & profiling -by a ranking of their “riskiness” -the plethora of equity linked structured product offerings that promise investors various levels of pay-off and capital security.
This knowledge and understanding will give an intermediary an ability to confidently access the world of structured products, enabling them to advise clients in building up a PORTFOLIO systematically, that will in turn provide global market exposure, linked dynamically to various asset classes, while offering diversification and varying risk: reward profiles.