Most read
‘Optimistic borrowers’ could endanger housing market, RBA says...
‘Optimistic borrowers’ could endanger housing market, RBA says...
Latest Podcast
Home values up 30% (or are they); NFTs taking the world by storm, and why Keatin...
Home values up 30% (or are they); NFTs taking the world by storm, and why Keatin...
Resources
There is $17.5 billion in lost and unclaimed super across ...
There is $17.5 billion in lost and unclaimed super across ...
Invest
Getting it right with structured products
Let’s get one thing straight: structured products aren't right for every investor, but they can play a valuable role in an SMSF portfolio as they provide known outcomes – on the upside as well as downside.
Getting it right with structured products
Let’s get one thing straight: structured products aren't right for every investor, but they can play a valuable role in an SMSF portfolio as they provide known outcomes – on the upside as well as downside.
The reasons why are quite simple. They offer diversification and a defined return profile; a return may be achieved irrespective of whether the underlying market is rising, flat or even falling. They offer exposure to different asset classes, locally and overseas, as well different investment strategies. Finally, they can be designed to suit investors’ varying risk appetites.
Stated like this the use of structured products would seem as simple as ABC. Indeed, not only simple, but a product that has a long lineage – back to the Old Testament. From the time men and women began commercial transactions, structured products have been a valued part of the system with the promise of a set return.
In their modern incarnation, structured products emerged in the 1980s, initially for the institutional market (due to their complexity), but by the turn of the century were increasingly part of the retail scene.
As equity markets globally got ahead of wind in their sails in the aftermath of the 'tech wreck' of 2001, structured products became a popular investment vehicle. The opportunity to gear to increase a return was very much in vogue.
But that infatuation with gearing, and how it related to structured products, came to an abrupt halt when Lehman Brothers imploded in 2008, having underwritten nearly $US20 billion in structured products. Suddenly this investment vehicle of choice for many was under scrutiny from regulators, governments, media and, most significantly, investors. Their complexity was questioned, as were their fee structures. Did investors really know what they were investing in?
Post-GFC, SMSF trustees and their advisers were looking for three things in their portfolios: transparency, simplicity and liquidity. For many advisers to trustees, structured products no longer fitted this bill.
Nearly eight years after the GFC, that degree of scepticism among advisers and trustees still remains. In-flows into these products have slowed, and some of the institutions that were major players in the space have taken their bat and ball and gone home. Certainly if the product involves debt funding, then SMSF trustee memories of how the pre-GFC debt splurge ended with blood on the streets is enough to make them shy away.
That all said the fund managers (boutique and large) continue to “manufacture” structured product that investors still lap it up, although not with the same alacrity as they did before the GFC.
What has to be remembered is that structured products have typically always been for the more sophisticated SMSF trustee who, more often or not, seeks advice before venturing down this investment path. This product has never been for what I call “meat and three veg” trustees – their portfolios don’t stray far from the staple diet of Australian equities (typically blue chip and of the fully franked variety) and cash.
No, structured products have always been of more interest to the more sophisticated, high-net trustees who have taken the time to either understand or get good advice on more complex products as part of building a diversified portfolio.
Post-GFC, a big change in the structured product market (and it reflects a change in investor sentiment across all investment vehicles) is the shift in how structured products fit in an SMSF portfolio. Before the GFC, tax benefits often drove the investment strategy; now it’s all about portfolio construction, as trustees have realised they can use these products to give their portfolios both diversity and exposure to an investment strategy that they simply could not afford via the stock standard assets.
There are other factors at play too. Yields remain low as trustees are looking at investments that can provide something more attractive than the cash rate, and some structured products fit this criteria. Capital protection, too, is front and centre of trustee thinking, and again structured products can be used to achieve this end.
Fund managers have also responded to investor complaints about products being harder to understand than E=mc2. Products are now simpler to comprehend, utilising basic instalment products and for debt limited recourse borrowing arrangements.
Indeed, much of the design of structured product is now done with SMSF trustees in mind; yield, capital protection and a product that they can understand being key features.
Structured products will never be for everyone; and for those who opt to use them in their portfolio, they will always a small percentage of the total asset pool. But they offer the opportunity to diversify, knowing that if the investment strategy works the upside is set in stone. The downside, of course, cannot be denied; that’s why the smart trustee only has a few of these eggs in his investment basket.
Stock market
Ethical investing tipped to drive ETF market
Following a volatile 2020 where investors poured into ETFs, shareholders are tipped to focus on ethical investing and technology as the recovery from the COVID-19 pandemic continues, an industry expe...Read more
Stock market
‘The concept of collective investing is here to stay’
The phenomenon of retail investors acting as a collective, led by social media and celebrity investors, is here to stay, says one expert. ...Read more
Stock market
What is short selling and should you do it?
Short selling stocks may sound like a good investment strategy when you’re after quick and big returns, but is it worth the risk? Here’s a rundown of why shorting stocks may not be a sound stock t...Read more
Stock market
How much insider trading really happens?
There are at least four times as many people who get away with insider trading than the number of those caught by prosecutors, new research has revealed. ...Read more
Stock market
Why you should be wary of the tech stock bandwagon
After a strong year of tech stock gains, tech shares have been on a decline in recent weeks as increasing bond yields rattle equity markets. ...Read more
Stock market
GameStop set to release first earnings since Reddit stock market rally
The video game retailer at the centre of the WallStreetBets saga is set to post its first quarterly market update since the fiasco began, with social-media investors heavily tipped to continue backing...Read more
Stock market
What is thematic investing and why it could be a fad
Long-term investors are being urged to ignore market fads and instead focus on identifying major socioeconomic, environmental and technological themes, an industry expert has explained. ...Read more
Stock market
ASX 300 companies cash in on JobKeeper scheme
Most of Australia’s ASX 300 companies that received JobKeeper payments did not need the subsidy as they recorded increases in profits throughout the calendar year, according to a study. ...Read more
Home values up 30% (or are they); NFTs taking the world by storm, and why Keating thinks Aussies will be ‘poor’ in retirement
Listen now
Raging floods, the tech stock bubble and the ongoing SG debate
Listen now
Meet the Manager with Trilogy’s Philip Ryan: RBA rates and property price growth
Listen now
The continued property boom, ethical investing and engaging with your super fund
Listen now
Stock market
Ethical investing tipped to drive ETF market
Following a volatile 2020 where investors poured into ETFs, shareholders are tipped to focus on ethical investing and technology as the recovery from the COVID-19 pandemic continues, an industry expe...Read more
Stock market
‘The concept of collective investing is here to stay’
The phenomenon of retail investors acting as a collective, led by social media and celebrity investors, is here to stay, says one expert. ...Read more
Stock market
What is short selling and should you do it?
Short selling stocks may sound like a good investment strategy when you’re after quick and big returns, but is it worth the risk? Here’s a rundown of why shorting stocks may not be a sound stock t...Read more
Stock market
How much insider trading really happens?
There are at least four times as many people who get away with insider trading than the number of those caught by prosecutors, new research has revealed. ...Read more
Stock market
Why you should be wary of the tech stock bandwagon
After a strong year of tech stock gains, tech shares have been on a decline in recent weeks as increasing bond yields rattle equity markets. ...Read more
Stock market
GameStop set to release first earnings since Reddit stock market rally
The video game retailer at the centre of the WallStreetBets saga is set to post its first quarterly market update since the fiasco began, with social-media investors heavily tipped to continue backing...Read more
Stock market
What is thematic investing and why it could be a fad
Long-term investors are being urged to ignore market fads and instead focus on identifying major socioeconomic, environmental and technological themes, an industry expert has explained. ...Read more
Stock market
ASX 300 companies cash in on JobKeeper scheme
Most of Australia’s ASX 300 companies that received JobKeeper payments did not need the subsidy as they recorded increases in profits throughout the calendar year, according to a study. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
