Best of Both Worlds

By: Absa Corporate and Investment Banking

Johann Gunter, Head of Distribution: Retail, Structured Solutions at Absa Corporate and Investment Banking
Johann Gunter, Head of Distribution: Retail, Structured Solutions at Absa Corporate and Investment Banking

Nobody likes to lose money – especially not investors, who understand the market’s inherent risk/returns trade-off, but still want some assurance that they’re going to get out at least what they’re putting in. Structured products offer exactly that, providing access to various asset class exposures along with a level of capital protection.

So, why isn’t everybody demanding that these types of investments form part of their portfolio? Probably because most investors don’t know very much about them.

“Historically, these products were mostly accessed by high- or ultra-high net worth clients,” says Johann Gunter, Head of Distribution: Retail, Structured Solutions at 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 that period. Structured products are much more accessible now, and we can provide a solution for a much wider range of investors – from individuals to corporates and trusts – with onshore and offshore options that can be accessed on multiple platforms. Increased demand for these products has led to lower minimum investment amounts, cost efficiency and therefore increased allocation to these innovative solutions within investors’ portfolios.”

How structured products work

Structured products have the ability to deliver on the dual promise of capital protection and market-linked returns through the basic construct of a zero-coupon bond with a call option. “Take a basic example of a Five-Year Note tracking an equity index with capital protection at maturity. First you have to solve for capital protection, and we do that in the form of a zero-coupon bond,” Gunter explains. 

“We’ll go to the bank treasury and say, ‘If we want R100 back from you in five years, how much do we need to give you today?’ If that’s R70, for argument’s sake, we’re left with R30 to buy exposure to an underlying equity index. We do this by buying a call option, which gives us our upside in the index. These two instruments are then delivered in the form a Note issued by the bank.”

For investors to enjoy the full benefit, they must remain invested for the full term (typically five years). “If you exit early, your zero-coupon bond won’t have pulled to par yet,” says Gunter. “Depending on the performance of the underlying equity index, that call option might be in or out the money – and that would affect the value of that investment at any given time in the market. That’s why these products are structured to term.” 

The most basic structured products are guaranteed plans, where – as Gunter puts it – “you invest, say, R100 000, and after five years you’re guaranteed to back a percentage of growth on that money, no questions asked”. Guaranteed income or guaranteed growth plans are not linked to equity. They provide full capital protection and have a secured return at a future date. 

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 would give you full capital protection after five years, together with the upside of an equity asset (for example, an index like the FTSE/JSE Top 40 or S&P 500),” Gunter says. 

“So if things do not go well over the next five years – let’s say we have a major financial crisis, where your traditional equity products participate fully in that downside – the structured product would still have a floor. Its capital protection means that you can’t get out less than you put in.”

Absa offers a range of structured solutions, with either defensive (conservative) or moderate (equity alternative) risk profiles. For more information, visit ss.absa.co.z

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