GLOBAL MARKETS

Structured Products:
Myths and Realities

Vuyo-Nogantshi

Vuyo Nogantshi

Head of Distribution: Index and
Structured Solutions, Absa CIB

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Are structured products really as complicated as some investors believe?

For investors, the proposition is simple: they want a desired return within an acceptable level of risk. But when it comes to achieving that outcome, things get complicated, quickly. “The investment universe is diverse and continues to become even more so with innovation,” says Vuyo Nogantshi, Head of Distribution: Index and Structured Solutions, at Absa Corporate and Investment Banking.

Nogantshi’s role includes overseeing a team that originates, structures and executes structured products, which are investments that meet specific investor needs with a customised asset mix. “The attraction of structured products is the ability to create investment outcomes that diversify an investor’s experience, reducing or removing correlations as required by the investor,” he says.

Over time, some myths and misconceptions have emerged around structured products, which Nogantshi is quick to dispel.

Myth 1: Structured products are overly complicated

“Structured products do come with complications, but that is largely tied into the language of the product,” says Nogantshi. “To get the best out of structured product exposure, it is important for the investor and advisor to do their homework – as you would with any asset class.”

A quick look at a structured product brochure illustrates what he means. The brochure for a Twin Fixed Return and Growth Protector issuance, for example, describes “a five-year, capital-protected investment […] linked to the Credit Suisse GEM 10% Risk Control (ER) Index”.

“This means that the product is an investment for five years, but you also know that your capital is safe, as long as the issuing bank doesn’t fall over,” Nogantshi explains. “The next part speaks to the underlying. In this case, the investment is linked to a long-term index that allocates between global equities and US treasuries.”

This short analysis highlights that the investor and advisor can glean key considerations already in the product material, but it is important that they both ask further questions to satisfy their own investment criteria.

Myth 2: There’s huge credit risk

No investment is entirely without risk. With structured products, there is some credit risk based on the issuer (or investment bank), so the investor would need to consider with whom they choose to contract.

“Working with well-capitalised institutions within a robust financial framework ensures that investors can sleep easier at night knowing that their product provider can weather the variabilities of the economic environment,” says Nogantshi.

Myth 3: The investor’s money is tied up

“Structured products are contractual,” says Nogantshi. “Investors commit an amount of money to a set series of outcomes, but the products can have split terms where money flows during the life of the product.”

Again, he uses a Twin Fixed Return and Growth Protector issuance as an example. “The product brochure outlines that after one year the investor receives a quarter of their money back, plus a fixed return of 26% based on that quarter of your money,” he says. “After three years you receive a quarter of your money back plus a fixed return of 52%, based on that quarter of your money. And after five years you receive the other half of your money back plus 150% uncapped participation (with FX) to any positive performance in the global developed market index, based on half of your money.”

As with many banking products, there is also the option for the investor to unwind the product early. “While this does change the guarantee profile as well as the payoff, it is possible if the investor needs early access to capital,” Nogantshi says.

Benefits of structured investment products

Structured products allow investors and advisors to craft outcomes that take into account various economic, social and political factors – the so-called “unknown unknowns”.

“With structured products, one can also smartly take advantage of any number of circumstances,” says Nogantshi. “The investor can aim for capital protection with the potential of upside participation in the performance of the underlying, and can craft returns for sideways or flat markets, aiming for fixed returns with capital guarantees.”

However, Nogantshi concludes that these investment products should – as always – be one of a range of options that investors consider when formulating their portfolios. “Structured products are not an ‘either or’ in our view,” he says. “They are an enhancement to portfolio construction that allows better portfolios for investors.”

Vuyo-Nogantshi
Vuyo Nogantshi

Head of Distribution: Index and Structured Solutions, Absa CIB

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