FEATURE STRUCTURED PRODUCTS
31 December 2019
CHARLES BRITS Head: Business Development, Wealthport
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oday, as South Africa is made up of a diverse group of people, there are requirements for a more flexible investment universe – one that provides transparency in relation to fees, real potential for solid returns and one that has adapted to the new age of investing. In fact, investors are starting to notice this shift and are looking for options that can work for a wider variety of investment outcomes, providing a substantial level of market certainty in such a volatile economy. Over the past few years, there has been a shift from conventional investments to so-called ‘alternative investments’ – where asset classes vary from traditional investments on the grounds of flexibility, liquidity, regulatory frameworks and modes of fund management. Structured products are an alternative investment model, and they are no longer the domain of only large corporate investors, as they have become more accessible to everyday investors via endowment and living annuity wrappers. Structured products combine two (or more) financial instruments that comprise a single structure. This usually includes an interest rate-linked product (zero coupon bond) – plus one or more financial derivatives – and are designed to provide a defined investment outcome, based on pre-determined parameters over the term of the product. They
BRIAN MCMILLAN Investec Structured Products
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tructured products have come a long way in recent years. From a specialised, exotic investment tool, they have become mainstream and financial advisers are now more comfortable to invest in them on behalf of clients. However, even as they grow in popularity, there’s a responsibility on issuers and advisers alike to keep clients informed about structured products, their role in an investment portfolio and the specific types of structured product and their features. In this article, we go through some of the key investment issues advisers and their clients need to understand before proceeding with an investment.
What is the client’s broad investment strategy? As an adviser, you’ll have a detailed investment strategy in place for your client, taking into account life stage, income requirements, risk tolerance and so on. A structured product needs to fit into this broad strategy. While each investor’s investment plan will differ, broadly speaking a structured product will be included in a portfolio for two reasons: to build
Structured products in an unpredictable world are unique in that they provide a clear investment objective, as well as capital protection. This is critical in a market such as ours where market conditions are adverse – providing the investor with a payoff profile upfront, ensuring no surprises down the line and helping shield investors from capital losses. Furthermore, tax efficiency is provided where structured products – within a Companies Endowment wrapper – are able to provide tax-free returns. Most structures are designed to generate capital, so capital gains tax (CGT) is used – not income tax/interest. They are also designed for a period of longer than three years and therefore classified as subject to CGT. Lastly, structured products provide access to alternative assets and markets, including access to both local and foreign indices or different currencies and/or baskets of assets. There are risks associated with any investment however and, with structured products, it is important to know who the credit issuer is and to check the investment grade status of the bank issuing the structured note – the better the rating, the less likely the bank will default on its obligation to investors. Better yet, it is always prudent to speak to a financial adviser and obtain specialist advice before selecting an investment portfolio. The adviser should
be one that has a clear understanding of the changing investment market, provides an independent view of what is best placed for one’s own unique investment profile and ensures full transparency around the costs and returns of the portfolio. As an independent platform, Wealthport has broken away from the tradition of supporting and hosting merely the ‘conventional’ categories of investments such as unit trusts, exchange traded funds and money market funds, by extending its wrapped offerings to include structured products. We are setting the benchmark when it comes to smart investing – making room for the dynamic market conditions investors find themselves in and creating opportunity for truly transparent, unique and solid investment advice and management. In fact, we are a leading structured product administrator and have won the SRP Award for the best LISP, as well as best technology platform in Africa in 2017 and 2018 – as voted for by our clients. Be part of the new age of investing today, contact Wealthport on 010 593 3103 or admin@wealthport. co.za for more information on our product offering and unique technology platform. Wealthport (Pty) Ltd is an authorised Administrative Financial Services Provider, FSP number 44158.
Using structured products to enhance a portfolio up an exposure in a particular asset protection and participation in the class or to hedge an existing strategic upside – as noted above, often geared. investment decision. This is useful for investors with a What are the liquidity long-term holding but who wish, at requirements of the investor? certain points in the market, to either Structured products come with a term hedge their exposure in the short or involved (three or five years are the medium term, or to take advantage of most common investment periods). short- or mediumWhile most issuers will term market provide some sort of conditions. commitment to pay out, STRUCTURED There are should the investor need PRODUCTS COME to access funds before the many structured WITH A TERM products that product matures, this can provide exposure result in the investor not INVOLVED (often geared) to realising the full potential a particular global index in a foreign of the investment – bear in mind that currency that the investor may feel most structured products are designed he or she doesn’t get from a typical to be held to maturity. balanced portfolio. The advantage of Typically, we would advise investors using a structured product in this way in structured products to only invest is that it doesn’t require accessing an with cash that they can tie up for the investor’s offshore allowance to do so duration of the investment period. or to breach the prudent investment guidelines that govern retirement Does the investor understand investments. the specific features? Moreover, structured products We spoke above about gearing and usually come with capital protection, capital protection. Gearing simply whereby some or all of the potential means the investor gets a multiple of downside in the underlying market the upside returns of the underlying is limited. Thus the investor enjoys index (say two or three times). While
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this is an excellent feature for most investors, it’s important to note that this is usually capped at a certain level. So if the underlying index advances beyond a certain level, the investor may not enjoy that full upside. Similarly, capital protection may be limited to, say, the first 30% of the downside of the underlying index. Depending on the structure, the investor may be exposed to the full extent of the loss beyond that. Falls of this degree are very rare over five years, but it’s still important that the investor understands the downside potential. Investors should understand also that they are foregoing the dividend portion of the return on the underlying index. This is because, when the issuer puts together the structured product, the prospective dividend income is generally deployed to provide the capital protection. Each structured product will have its own combination of features, but if the adviser and client are prepared to talk through their role in a holistic way and to also go through the features and scenarios for each product, they can be a true enhancement in an investment strategy.
