All about structured products

In recent years, structured products have become increasingly popular with investors looking to diversify their portfolio and take advantage of market volatility. In this article, we will explore what structured products are, their advantages and disadvantages, and the risks associated with their use.

Read more: Focus on Sales-Structurer in banking

What is a structured product?

Structured products are unlisted financial products, set up by a bank, and can be subscribed to directly or in a life insurance contract. They are complex products that combine several different financial instruments to offer a potentially higher return than 'traditional' investments (stocks, bonds, mutual funds, etc.). They can be designed to meet specific investor needs, such as protection against volatility, increasing profitability or generating regular income.

There are several categories of structured products: capital-guaranteed structured products and structured products without capital guarantee. Structured products with capital protection partially or fully protect the invested capital if the underlying falls.  In contrast, with structured products without capital protection, the investor may lose part (or all) of the capital depending on the performance of the underlying.

The underlying is the financial instrument to which a structured product refers: it can be a share, a basket of shares, or an index. The development of the value of the underlying is the most important factor influencing the price development of the structured product. If the price of the underlying falls, the investor may lose part of his investment.

How do structured products work?

There are several steps to understanding how a structured product works:

• Subscription: Subscription is the process by which the investor purchases the structured product from the bank or management company that issued it.
• The strike (settlement date): The strike is the date on which the value of the structured product is measured against the performance of the base product.
• Closing: Closing is the process by which the investor sells the structured product. This can occur at any time prior to the maturity date of the product, although the value of the product may be lower or higher than the initial value. 

What are the advantages of this type of product?

There are several advantages to this type of financial product:

• An additional source of diversification: Structured products are an interesting alternative to "classic" equity mutual funds.
• A tailor-made product: The almost unlimited structuring possibilities make it possible to respond to various investor profiles and to seek to generate performance even when markets are down.
• A gain objective known in advance: This means that the investor knows exactly how much he can potentially gain with the structured product.
• Capital protection at maturity (total or partial).
• A tax advantage: These products are accessible via life insurance contracts or PER.

What are the risks associated with structured products?

Structured products may be subject to risks, such as the risk of loss of capital, the risk of default by the issuer and market risk.

There is a risk of loss of capital in the event of exit before maturity, or outside the early redemption dates.

The risk of issuer default is an important risk associated with structured products. As structured products are issued by financial institutions, there is a risk that the issuer will not be able to repay investors at the maturity of the product or in the event of default.

Market risk is the risk that the value of the structured product will decline due to factors such as changes in interest rates.

Athena, Phoenix: how to make the difference?

It is also possible to speak of "Athena" or "Phoenix" type products:

• Athena: In the case of an "Athena" product, the possible coupons are not detached periodically but are valued in the value of the share.
• Phoenix: In the case of a "Phoenix" product, any coupons are detached periodically (e.g. semi-annually or annually).

 The coupons are the income generated by your structured product. In conclusion, they can be received at maturity, as is the case for the so-called "Athena" or periodic products. We then speak of "Phoenix" products.

Read more: Equities and bonds: how to value them in your M&A analysis?