Issuers launch non-equity linked structured products; investors keen to diversify, adviser says

By Kenneth Lim

Boston, April 6 - Non-equity linked structured products continue to be of interest to investors who want to greater diversification beyond the traditional asset classes, an investment adviser said.

Issuers launched a number of those products to begin the week on Monday.

Barclays Bank plc, through agent JPMorgan, is offering zero-coupon 96% principal protected notes due April 20, 2010 linked to the yen-dollar exchange rate.

At maturity, investors will receive 96% of par plus 1.135 times of any gain in the underlying exchange rate, subject to a maximum total payout of 110.8% of the principal. Investors will not receive less than 96% of their principal.

Barclays also plans to price principal protected annual conditional coupon notes due April 30, 2013 linked to the euro/dollar exchange rate.

On every anniversary of the notes, investors will receive a coupon, set at 9.5% to 10.5%, provided the exchange rate is above 110% of its initial level. Otherwise investors will not receive a coupon for that year. Investors will receive par at maturity. The exact coupon will be set at pricing.

UBS AG, through its Jersey branch, is also planning zero-coupon principal protected barrier notes due April 29, 2011 linked to the euro/dollar exchange rate. At maturity, investors will receive par plus any gain in the exchange rate if the rate never goes above 135% to 139% of the initial level. The exact barrier level will be set at pricing.

If the exchange rate ends flat or declines and never goes above the barrier level, investors will receive par. If the rate goes above the barrier level, investors will receive 104% of par.

JPMorgan Chase & Co. plans to sell semi-annual review notes due April 13, 2011 linked to the price of gold.

The notes may be automatically called, and investors will receive par plus a call premium, if the price of gold is at or above the trigger price at the relevant call date. The trigger price is 90% of the initial gold price level and the premium is at least 5.5% on the first call date on Oct. 9, 2009; the trigger price is 100% of the initial level with a premium of at least 11% on April 9, 2010; the trigger price is 100% with a premium of at least 16.5% on Oct. 8, 2010; and the trigger price is 100% with a premium of at least 22% on April 8, 2011. The exact premiums will be set at pricing.

If the notes are not called, investors will lose 1% for every 1% that gold declines by more than 15%. Otherwise investors will receive par at maturity.

Diversification opportunities

Non-equity linked structured products remain interesting to investors because they are a convenient way to access different asset classes, the investment adviser said.

"Structured products allow investors to take certain positions on asset classes like commodities and currencies that would otherwise be very troublesome to create," the adviser said.

"I could buy a principal-protected product linked to a currency pair through one of the issuers or I could go out and try to buy and sell contracts on my own, which is more difficult to do and isn't necessarily more efficient. I'll be concerned about issuer risk, but I don't have to take on the risk of actually owning any of those assets. I think in commodities, currencies, interest rates, that where structured products have a very strong value-added proposition for investors."

Asset classes beyond equities are also getting a closer look as investors look to diversify their portfolios, the adviser said.

"I think a lot of investors are understanding the importance of diversifying, not just between asset classes but also in terms of risk exposure and maturities and structures," the adviser said.

"It's not just having 30% equity, 30% bonds and so on, it's also adjusting your exposure to different scenarios. So with structured products, it's not just getting a product that's exposed to a commodity, it's getting a product that's exposed to a commodity with principal protection for the next year."

Unclear categories

But one aspect of structured products that could be keeping investors away is the difficulty of categorizing them, the adviser said.

"When you buy a structured note linked to the S&P 500, do you count it as bond or equity exposure?" the adviser said.

"Most of the time I know people just count it as 'others,' but that's kind of sweeping the problem under the rug, and that doesn't really give a useful picture of how a portfolio's exposure. I think this is one problem and I think it would be a good problem to figure out.

"One way could be to separate the portfolio's risk and return exposure, so maybe if it's a principal-protected note linked to the S&P 500 its risk exposure would be more like a bond, but returns-wise it would be more like equity. But obviously it gets more complicated with more complicated structures, and a lot of things will probably fall between the cracks."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.