Structured products, despite their complexity, can be understood through three basic features. The performance of a structured product hinges on its underlying assets, which are typically equities or indices. Investors looking to secure their pension funds might choose country indices like Nikkei, S&P, Dow Jones, or Euro Stoxx. These indices are considered ultra-safe due to their lower volatility and lesser likelihood of prolonged downturns.
Investors have a wide range of underlying assets to choose from. A technology enthusiast might opt for a structured product comprising equities from Facebook, Apple, Netflix, and Sony, forming a tech-centric basket we’ll call the FANS basket. The performance of a structured product is often linked to its weakest underlying asset. For instance, if Facebook underperforms at 80% of the buy-in price within the FANS basket, the structured product’s performance will also be at 80%.
The coupon trigger is another crucial feature, determining if coupons (similar to dividends) are paid out. As long as the worst-performing underlying asset remains above the coupon trigger, payments are made. For example, with a 70% coupon trigger, the underlying assets can drop to 70% of their buy-in price, and the coupons will still be paid. Considering the FANS basket, if Facebook stands at 80%, Apple at 92%, Netflix at 84%, and Sony at 97%, coupons will be paid out since Facebook, the lowest performer, is above the 70% threshold. Even if all underlying assets dip below their buy-in price, the investor still receives the coupon, ensuring a profit.
The protection barrier operates similarly to the coupon trigger but focuses on safeguarding the investor’s capital. At maturity, if the worst-performing underlying asset is above the protection barrier, the full capital is returned. This feature enhances the appeal of structured products, especially in volatile markets. For example, with a 60% protection barrier, underlying assets can fall to 60% of the buy-in price, and the investor’s full capital will still be returned at maturity. In contrast, a traditional investment might result in a 40% loss.
These three features—underlying assets, coupon trigger, and protection barrier—constitute the core elements of most structured products. Additional features can be included to tailor the product to meet specific investor profiles and preferences.
TEAM plc (LON:TEAM) is building a new wealth, asset management and complementary financial services group. With a focus on the UK, Crown Dependencies and International Finance Centres, the strategy is to build local businesses of scale around TEAM’s core skill of providing investment management services.
