Structured Products have been on the market for several years now and are steadily gaining in popularity as people seek ways of generating higher returns on their capital in a low-interest environment.
A Structured Product is essentially a promise by the issuing bank to pay pre-determined returns in a pre-defined set of circumstances. So, for example, a product may take as its reference point (known as the strike level) the closing level of the FTSE index in London on a particular date. The terms may then go on to offer a fixed return of 9% if the FTSE index is level or higher than its strike level on the first anniversary. If the FTSE is lower on this date, the investment will typically roll for another year, at which time the return will be 9% for each year the product has run, provided the FTSE is now level with or higher than its strike level (i.e., 18% on the second anniversary). This process usually continues for five years, and if no payout has been made by the fifth anniversary, there is usually a clearly defined set of criteria for the return of capital. This is typically expressed as a ‘barrier’ providing for the full return of capital so long as the barrier has not been breached. In this example, if the barrier was set at 50% of strike level, and if on the 5th anniversary of the investment the FTSE was down 38% from its strike level, capital would be returned in full to the investor.
Structured Products come in many different forms. Some are designed to provide capital growth, others are designed to provide a regular income. It is important to make sure you understand the terms of each individual product before you commit. Some products will charge an entrance fee, and others will not. If a fee is charged, remember to factor it in to your calculations!
Investors often wonder if they are locked in to a Structured Product for the full term of the investment. The answer to this has to be that you should only take out an investment of this nature if you are prepared to hold it for the intended term, however you are able to sell the investment on the secondary market at any time. If you take this route, however, the price achieved will be the prevailing market price, and will take into account the attractiveness of the product compared to other offerings on the market at the time.