Structured products deliver the goods in turbulent times

Japie Lubbe of Investec Bank’s structured products team

East Asian Growth Basket boasts a strong success rate and a diversified basket of global equity indices

One of the popular refrains you hear in the investment world is “it’s not timing the market that matters, but time in the market”. On almost every measure, a buy-and-hold strategy has historically been the best approach for investing in the equity market, even allowing for sharp drawdowns, such as those seen in the Global Financial Crisis of 2008, the early months of the Covid-19 pandemic in 2020, and the volatility we experienced in April and May this year.

While such a strategy makes sense over the very long term, we should not discount the impact of major market selloffs in undermining your growth targets over time. For example, an investment in the Nasdaq in 1992 would have yielded a simple compound annual growth rate of almost 8% over 30 years in US dollars that would have largely compensated for events such as the Dotcom crash in 2001 and the Global Financial Crisis.

However, a 22-year investment in the Nasdaq – at the then peak of the market – would only have broken even in October 2017. While the Nasdaq has performed well since then, this still only amounts to a compound annual growth rate over the 22 years of less than 2% in US dollars.

In short, investors would do well to take drawdowns into account as part of their investment planning. This holds true for a diversified portfolio, as well as for a “narrow” index such as the Nasdaq – events such as the Global Financial Crisis and the 2020 lockdowns knocked most equity classes.

Derivatives, including strategies such as put options, can provide some insurance while helping to lock in the upside, but these can be expensive to structure, especially for private investors. However a number of financial products can help investors to manage the impact of drawdowns while also participating in the upside.

Diversification and protection

Structured equity products have proven to be a popular method for investors to earn returns and manage their downside risks against bouts of volatility. Japie Lubbe of Investec Bank’s structured products team, cites the growth of Investec’s own products as an example of this – on a total basis (market growth plus net flows) Investec’s book has grown 16% per annum over the past 13 years. And out of 98 products that have matured over that period, none have realised a capital loss for investors.

One such product with a track record of success is the East Asian Growth Basket, a five-year structured investment linked to growth in a diversified basket of global equity indices.

“The East Asian Growth Basket has a solid track record over the years, returning an indicative 63.20% in USD for investors over the most recent five-year period (versus an index growth of 34.3%). Investors have been able to enjoy solid growth, despite the impact of events such as the Global Financial Crisis or the Covid-19 lockdowns,” says Lubbe.

“The East Asian Growth Basket has proved itself through many difficult phases for investors, providing peace of mind and upside participation.”

The upcoming iteration of the East Asian Growth Basket, which gives participation in the upside of four leading indices – the S&P 500 (45%), Euro Stoxx 50 (20%), Nikkei 225 (20%) and emerging markets (15%) – closes in June.

The East Asian Growth Basket offers 120% gearing on the upside of the performance of the indices making up the basket (in other words, investors get 1.2 times the performance of the underlying), capped at an index growth of 40% – all in US dollars. This equates to a maximum investor return of 48% (1.2 x 40%) in US dollars.

Importantly, investors get 100% US dollar protection to the downside, by means of a subordinated debt instrument issued by Investec Limited. Investors do need to be comfortable with the credit risk of this instrument before investing.

The product is furthermore priced daily and investors can liquidate their holdings at any time, under normal market conditions.

“A portfolio made up of the world’s leading indices, in hard currency, has proven to be a winning strategy for investors over the long terms,” argues Lubbe. “However, given uncertainties surrounding global inflation and the war in Ukraine, it’s a prudent approach to seek downside protection, without surrendering material upside.”

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