Are structured investment products capital guarantees in volatile times?

With these, investment houses can provide capital protection in volatile times filled with uncertainty.


In a time of market uncertainty and volatile equity markets, many investors are looking for stability in their returns.

As such, many investors and advisors are considering structured products, to either take advantage of this volatility or use the opportunity that the current higher interest rates environment provides to obtain capital protection together with participation in an underlying asset.

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By definition, structured products are investments linked to any variety of underlying assets, such as a single share or fund, a basket of shares, indices or even commodities. In this way, investment houses can provide capital protection in volatile times filled with uncertainty.

According to Francois Strydom from Momentum Securities, structured products should be considered for the right reason and at the right time.

“Simply put, structured products should be increasing expected returns on a portfolio without increasing the risk. Alternatively, they should be maintaining the expected return while actively decreasing the risk.”

Market conditions may vary

“Market conditions in which structured notes are appropriate may vary. Sometimes you have short periods of high volatility, then you need to capitalise on that volatility. But in doing so, you still need to consider what the client’s needs are. If they allow you to stay invested for long periods of time in an equity portfolio, then chances are you have greatly increased the expected return of the overall portfolio without increasing the risk profile by adding a volatility driven strategy in that portfolio.”

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In a South African context, Strydom says these structured products also provide South African investors exposure to the returns of offshore indices.

“Whether you are making use of volatility or seeking greater exposure to mega trends like ESG or other broad-based investment themes, ZAR based structured products are effective ways of getting exposure to the returns of global indices without impacting your annual foreign investment allowance,” he said.

Considering that fee disclosures on these products are still evolving, Strydom says investors must be cautious around the cost structures of these products.

“Disclosure has become an issue that needs to be more firmly regulated. Investors do not always understand they are paying multiple levels of fees that eat into their returns.”

He says this is why Momentum Securities provides full disclosure and transparency on the costs involved, from advisory fees to administration fees, right down to structuring and distribution fees.

*info and write-up provided by Momentum Securities

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