One way to protect your capital while participating in any potential market
increases from their current depressed levels is to invest in a capital secure
product. Capital protected structured products, often referred to as ‘tracker
bonds’, provide the facility to gain exposure to a range of potential
investments across a variety of asset classes, without some of the associated
risks.
This would usually take the form of security over the investment amount at
the end of the set investment period, with a given level of exposure to a fixed
investment strategy or index for that term. For both the company designing the
product and anybody considering making an investment, it is crucial to analyse
not only the underlying investment, but also the specific terms of the product.
The terms of a structured product are the result of a process of
prioritisation and trade-off between a selection of key factors.
Level of protection
Traditionally, the full investment amount is protected, so the minimum value
of the product at the end of the investment term is the original amount
invested. This causes the basic trade-off that if you have limited the downside
risk, you may not be able to achieve the same exposure to the underlying assets
as investing in those assets directly.
More recently, a variety of protection levels have been used. By offering
security over only 95 per cent or 90 per cent of the amount invested, it is
possible to increase the level to which an investor participates in the
performance of the underlying assets. Conversely, it is possible to secure a
minimum of 105 per cent of the original capital at the end of the investment
term, though this would further reduce the potential returns of the product.
Alternatively, there are options to invest in a ‘soft’ capital guarantee.
For example, the Nomura Autocallable note is a variable-term
investment (minimum one-year and maximum five-year) that offers exposure to the
FTSE 100 and S&P 500
If this index is equal to or greater than its initial level on any of the
anniversary dates, the investments will automatically mature through an
autocall option and will pay an indicative gross return of 14 per cent for each
year invested.
