Innovation in Equity-Linked Structured Products

Innovation in Equity-Linked Structured Products

By Elisabeth Bourqui, Director, Structured Product Sales, SG Americas Securities LLC

Structured products are intended to complement other management approaches. Their main appeal lies in their ability to meet a wide range of specific investment challenges, ranging from protection of capital to performance and diversification of market scenarios covered.

From the investor’s standpoint, compared to balanced funds, structured products can provide value-added along with a clear improvement of the efficient investment frontier. At the same time, they are an innovative field, providing investors with alternatives to traditional investments and fulfilling client needs related to specific market conditions in ways that traditional investments cannot.

Opening Up Opportunity

Analyzing the market context over recent decades, certain key client needs can be identified. For instance, with the emerging market crisis in 1998, equity volatility and risk aversion were increasingly high while interest rates were low. As a result, investors could hardly afford principal protection plus an exposure to any increase. Clients needed principal protected investments linked to equities that were not reliant on bullish markets to generate performance. At this stage, it was only possible to bet on the increase or the decrease of equity markets. However, using Structured Products, investors can now bet on the ‘non-decrease’ of equity markets with principal protection.

Another example is the market context for European Insurance companies in 2003 -- specifically their need to generate Euribor + 200 bps to match their liability constraints. Such companies also suffered from the huge decreases in equity markets, resulting in real solvency or funding concerns. Clients needed to invest in equity markets to profit from a potential rebound. However, they weren’t able to make a direct investment due to regulatory restrictions, and they couldn’t afford anymore severe losses. At this stage, it was only possible to bet on the increase of the equity markets or invest in a fixed income instrument. With the new generation of structured products, it is now possible to use the equity markets to generate potential fixed income returns.

Moreover, when structured products are used as an alternative to equity investments, investors can also benefit from product enhancement features. They include: access to the best entry level or the best exit point on a product or exposure to thematic investments through dedicated indices such as private equity or renewable energy indices.

As these examples illustrate, equity-linked structured products should not be seen as trendy investments but as long lasting financial tools with the ability to provide added value through access to new developments and innovation, and the flexibility to address a broad and diverse range of client needs.

Transcontinental Media G.P.