Designed to meet a specific investment objective, Structured Products are typically designed around an underlying asset such as an individual equity, index, foreign exchange, commodity or hybrid asset. A debt security is combined with the derivative security to achieve the desired objective.
Structured Products offer investors the ability to tailor their investment to a specific objective such as principal protection, income, or enhanced diversification. In addition, these flexible investments can allow investors the benefit of investing in multiple asset classes without the complex credit, legal and operational issues that surround the execution of derivative strategies.
At Ziegler, we offer investors four basic types of Structured Products, ranging from relatively conservative investments to those that offer greater potential returns while taking on more risk.
1. Principal Protected. Principal Protected investments provide investors exposure to a market security while protecting part or all of their principal at maturity. Investors generally exchange most or all of the coupon payments that would be paid on traditional fixed income investments for a degree of market participation that is payable at maturity. These strategies can be “bullish” or “bearish”.
A Principal Protected investment may be appropriate for an investor who anticipates that the market will appreciate but is concerned about principal risk. This individual is willing to forgo some upside potential or yield in exchange for principal protection at maturity.
2. Enhanced Yield (Protected Buy-Write). In the Enhanced Yield category of structured products, Ziegler offers protected buy-write securities. These investments provide for the return of principal at maturity. Buy-Writes initially pay a variable coupon based on an equity allocation that is paid monthly. While the initial target rate of interest is typically between 7% and 10%, the actual monthly coupon may be anywhere between 0% and 15%. Protected Buy-Write securities provide the potential for limited capital appreciation based on the performance of the underlying portfolio.
3. Reverse Convertibles. Reverse Convertibles combine features of debt and equity and are linked to a single stock and provide for periodic fixed coupon payments. Unlike ordinary debt securities, Reverse Convertibles do not guarantee return of principal at maturity. Instead, the payment received by investors at maturity is dependent upon the price performance of the underlying stock.
A Reverse Convertible may be appropriate for an investor seeking current income and who is comfortable with downside exposure if the underlying security trades below a predetermined level.
4. Leverage Performance. Leverage Performance strategies can provide access, compliment or replace existing exposure to an underlying asset. These strategies may reduce risk of a specific allocation by taking advantage of leverage, do not pay interest and may be subject to a maximum return at maturity.
A Leverage Performance security may be appropriate for a client who believes the market will appreciate or depreciate modestly in the near term and would like to enhance returns. This investor is comfortable with downside exposure and is willing to forgo upside potential above a cap in return for the leverage.