Structured Products Provide Excellent Opportunities
Investing in structured products attracts many private investors. At the same time, there are sometimes considerable concerns regarding risks and transparency. Roland Theiler creates customized solutions for Credit Suisse's wealthy clients. In this interview, he explains what investors should consider when investing in structured products.
For whom are structured products suitable?
Roland Theiler*: In principle, they are suitable for all investors. Structured products are nothing more than a combination of an underlying asset and a derivative component. They make it possible to invest in a specific strategy. This means it does not matter whether investors expect the market to develop sideways, positively, or negatively, because they can tailor structured products to their own requirements.
Structured products are often associated with increased risk. Can cautious investors also profit from the opportunities on offer?
Yes, because there are various categories of structured products. For example, capital-protected variants guarantee to repay the invested capital at the end of the term. With this variant, conservative investors can participate in the development of the markets without taking high risks. Another option is high-risk products. A major advantage of structured products is their versatile structure. This means that investors know how high the risk is for them from the outset.
In the case of capital protection products, the return is limited. Are they really a worthwhile investment?
With capital protection products, investors always try to achieve a greater return than they would with fixed-interest investments. Therefore, if market expectations are met, the investment will be worth it. Furthermore, the underlying asset of structured products is flexible, which opens up additional possibilities.
Individual securities in the portfolio and issuers should be well diversified.
As the issuer risk cannot be eliminated, what do you advise?
The risk can be mitigated if the investor avoids selecting a large concentration of products from the same issuer. However, concentration risks can also arise from underlying assets. For example, many barrier reverse convertibles in client portfolios contain the same single stocks. This was also the case during the financial crisis, where bank shares in structured products were often above average. It is therefore imperative to ensure that individual securities in the portfolio and issuers are well diversified.
What should I consider if I want to invest in structured products?
The most important thing is to know your personal risk tolerance and market expectations. From here, you can decide which products are worth considering. Only then should you select a suitable underlying asset. Which make sense? What is the current situation? If investors want to invest a higher amount in structured products, it is also worth staggering this over several months or quarters, as the coupon amount of structured products essentially depends on the volatility. If uncertainty in the markets is high, the coupon can be more than twice as high as when the markets are stable.
What other tactical advice can you offer?
For barrier reverse convertibles, investors should always keep the barrier at the same level. Especially after market corrections, investors tend to lower the barrier as a cushion. However, it is important to stick to your predefined goals even in periods of market uncertainty. Typically, the compensation would, indeed, be higher but this would be counteracted by a lower barrier. This also applies in the opposite case. Even if the coupons are low, the barrier should not always be further raised. My second piece of advice is to actively monitor your products throughout their terms. Investors must be prepared to sell a product earlier than planned, and in an emergency at a loss, if the product is nearing the barrier and the forecast for the underlying asset is negative. Conversely, depending on the performance, it can also be worthwhile to sell a product, which is a long way from the barrier, if there is potential for a greater return with a different product.
How does an investor know when the time is right?
An important signal for reassessing your investments is uncertainty regarding increased volatility on the markets. At this point, it is a good idea to check whether a different product would be more profitable and whether an existing product should, at best, be sold early. Typical events include meetings of national banks, elections, and referendums, which can already bring about increased volatility in the run-up to the event. In terms of company-specific events, the best time is before quarterly or annual figures are released. Here at Credit Suisse, we actively advise clients of opportunities and ideas as part of our investment advisory services.
What opportunities are there to invest in structured products on a systematic basis?
One way to do this is with barrier reverse convertibles, the ultimate classic structured product. Here, as far as possible, it is important to select underlying assets, which will not fall below the barrier. Together with our research experts, we define the "best picks" every month – securities that, according to our expectations, will not decline by more than 40 percent over the next 18 months. Combined with a higher coupon amount, this can be a system that promises success. We offer a research alert for interested investors.
What should be the maximum value of structured products in the portfolio?
There is no upper threshold. It depends on the investor and the overall strategy. As you have the freedom to play with the entire spectrum, a 100-percent share would theoretically be possible. In reality, however, only a proportion of fixed-income investments and share positions are usually covered by structured products. This is because investors often prefer direct investments, such as stocks and bonds, and use structured products for special scenarios, for example to achieve additional returns in the event of sideways-trending markets.
Why are structured products niche products despite the multitude of options available?
The field of structured products grew strongly before the financial crisis. However, the collapse of the U.S. investment bank Lehman Brothers shattered this confidence. Increasingly complex products, the structure of which investors no longer understood, discredited the asset class. For several years now, however, we have seen a renewed interest in and increased volumes of these products. Undoubtedly, one of the reasons for this is that the products are once again easy to understand and the costs are transparent.
Structured products offer excellent opportunities to implement a strategy quickly and invest even very small amounts in customized products.
How important are structured products at Credit Suisse?
In my opinion, not enough value is placed on structured products in securities portfolios in general. They offer excellent opportunities to implement a strategy quickly and invest even very small amounts in customized products. For this reason, at Credit Suisse we have an open platform to work with clients to find and implement the optimum strategy, regardless of the product issuer.
Can private investors also trade in structured products themselves?
Informed investors can purchase products themselves. But I would not recommend this, precisely because the options are so varied. Maybe returns could be improved with a different barrier or a different underlying asset may suit the portfolio better. Getting advice is also important, for example, when it comes to the timing of the investment.