Given the turbulent state of the financial markets, it is easy to think that you should only put money into cash. However, with interest rates at record lows, this is hardly an attractive proposition for investors seeking to maximise returns or produce the same level of return that their pension projections have been based upon. Luckily, there are some alternatives, including a vehicle that pays out a generous bonus and promises to back your original investment.
The product
This type of investment vehicle is known as a 'structured product' and is from a product group that is used internationally by banks, insurance companies and fund managers to create returns that have something different from traditionally managed investment funds. Quite simply, the creators of these products package different components together to make something that has an element of certainty quite unlike anything that a managed fund can provide.
There are a number of structured investment products on the market offering security of capital, provided that the money remains invested for a fixed period of time. At least that protects you from losing more money, but what about the investment returns?
As with all structured products, the risk lies with the financial strength of the company giving the underlying guarantees and the way in which it arranges the delivery of the returns to investors.
This vehicle's investment strategy uses derivatives combined with products providing certain returns to allow the fund managers to decide what they can promise. Some will offer a given return dependant upon certain indices or instruments performing as expected, while others will make a payout if the price of a certain commodity remains within a given range of parameters. Whatever their rationale or strategy, structured products can provide some element of certainty within a portfolio, which 'straight' equity, bonds or property investments cannot.
Who can benefit?
The scheme's most important advantage is certainty of capital. This is often a requirement for personal or corporate pension fund investors, charities and endowment funds, where security of capital is important. Many people are risk-averse and cannot take the chance that their capital will be lost or eroded. Similarly, for a proportion of their portfolio anyway, they cannot take the chance that the returns they receive are too small to make their money compete with inflation or other rising costs.
Structured products are becoming much more popular within both retail and institutional markets as issuers generate new ways of creating good returns while managing risk. They are increasingly being considered by portfolio managers and their clients as they seek to achieve good results in a constantly changing investment landscape. If you think this investment vehicle might suit your needs, give us a call and we will help assess the situation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
