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EXCHANGE TRADED FUNDS
Best of Both Worlds Absa’s range of structured solutions offers an attractive mix of capital protection and access to various asset class exposures. How do they work, and what role could they play in your clients’ investment portfolios?
N
obody likes to lose money – especially not
For investors to enjoy the full benefit, they must remain
investors, who understand the market’s inherent
invested for the full term (typically five years). “If you exit early,
risk/returns trade-off, but still want some
your zero-coupon bond won’t have pulled to par yet,” says
assurance that they’re going to get out at least what
Gunter. “Depending on the performance of the underlying
they’re putting in. Structured products offer exactly that,
equity index, that call option might be in or out the money –
providing access to various asset class exposures
and that would affect the value of that investment
along with a level of capital protection.
at any given time in the market. That’s why
So why isn’t everybody demanding that
these products are structured to term.”
these types of investments form part of
The most basic structured products are
their portfolio?
guaranteed plans, where – as Gunter puts
Probably because most investors don’t
it – “you invest, say, R100 000 and after
know very much about them.
five years you’re guaranteed to back a
“Historically these products were
percentage of growth on that money, no
mostly accessed by high- or ultra-high net
questions asked”. Guaranteed income or
worth clients,” says Johann Gunter, Head
guaranteed growth plans are not linked to
of Distribution: Retail, Structured Solutions at
equity, they provide full capital protection, and
Absa Corporate and Investment Banking. “There’s much wider use of these products now than there was, for example, 10 years ago, and that’s a direct result of how much the products have evolved over
they have a secured return at a future date. Johann Gunter, Head of Distribution: Retail Structured Solutions
that period. Structured products are much more
From that basic construct, structured products have evolved to shape, diversify – and potentially increase – their pay-off from risk assets (like equities). “A very basic structured product like this
accessible now, and we can provide a solution for a much
would give you full capital protection after five years, together
wider range of investors – from individuals to corporates
with the upside of an equity asset (for example, an index like
and trusts – with onshore and offshore options that can be
the FTSE/JSE Top 40 or S&P 500),” Gunter says. “So if things
accessed on multiple platforms. Increased demand for these
do not go well over the next five years – let’s say we have a
products has led to lower minimum investment amounts,
major financial crisis, where your traditional equity products
cost efficiency and therefore increased allocation to these
participate fully in that downside – the structured product
innovative solutions within investors’ portfolios.”
would still have a floor. Its capital protection means that you can’t get out less than you put in.”
HOW STRUCTURED PRODUCTS WORK Structured products have the ability to deliver on the dual
LIQUIDITY AND DIVERSITY
promise of capital protection and market-linked returns
For financial advisers, structured products offer a very useful
through the basic construct of a zero-coupon bond with a call
planning tool, especially if they are included as an allocation
option. “Take a basic example of a Five-Year Note tracking an
(some advisers recommend up to 25%) of the investor’s
equity index with capital protection at maturity. First you have
portfolio. “Some people make the mistake of looking at
to solve for capital protection, and we do that in the form of
structured products as standalone products,” says Gunter.
a zero-coupon bond,” Gunter explains. “We’ll go to the bank
“Instead, they should be seen as building blocks in a client’s
treasury and say, ‘If we want R100 back from you in five years,
portfolio. As a financial adviser, you can allocate to these
how much do we need to give you today?’ If that’s R70, for
products depending on your client’s risk profile, or you could
argument’s sake, we’re left with R30 to buy exposure to an
use a combination of structured products. In terms of equity
underlying equity index. We do this by buying a call option,
exposure, it makes sense to diversify geographically and
which gives us our upside in the index. These two instruments
into different sectors, but it also makes sense to diversify the
are then delivered in the form a Note issued by the bank.”
pay-off you get from those equities. A structured product is a
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