“I’ve failed over and over and over again in my life and that is why I succeed.“ Michael Jordan
With less and less access to quality higher yielding corporate bonds, investors will, out of need, start to gravitate towards alternate yield enhanced securities or structured products. Here we run through a quick expose of what these securities are, the risks involved and how they perform.
“Structured products are defined as investment products whose repayment value derives from the behaviour of one or more underlying assets.” Structured products are pre-packaged investment strategies. They are often combinations of traditional investments in shares or bonds and financial derivatives. Traditional investments and derivatives are combined in a single financial instrument and securitised. Such “structuring” allows investment products to be created with risk-return characteristics that match the specific needs and expectations of investors.
“European structured products market records 34% growth” – Asset News 2019/2020 Year
One of the key benefits of structured products is that the time to market is short, enabling them to react quickly to latest trends in financial markets. The manufacturing process of structured products often starts with investment banks and involves multiple parties along the value chain. The type of wrappers determines the structuring approach.
The most common, and frequently used products include, structured bonds or medium-term notes (MTN), structured deposits and structured funds.
The decision between holding on to, or trading out of, structured products prior to planned maturity depends on the type of wrapper and issuing entity. Investors of structured deposits and life bonds tend to buy and hold the investment until maturity, while most structured funds and certificates change hands many times over their life cycles. A reliable and accessible secondary market is key to the success of any structured product and this is something The Australian Bond Exchange is addressing in creating a platform for exactly this to take place.
The key takeaways affecting the structured product landscape are, a commitment by central banks to keep rates low, a continuing improvement in the credit worthiness of issuers and Investors having better acceptance and understanding of capital at risk products which are easier to structure due to low interest rates and can offer attractive yields compared to other available products ranging from 5% and above.
Increasingly, investors can directly value and trade structured products using online platforms such as the one created by The Australian Bond Exchange and accessible by every IRESS user both domestically and overseas. However, the call for greater pricing transparency and the introduction of new regulation around best execution has encouraged some markets to adopt a more open architecture for secondary trading where offerings from various issuers are consolidated and priced through integrated multi-issuer platforms, in this case the ASX.
The Australian Bond Exchange is committed to producing, and delivering, quality yield enhanced products. In that regard we encourage all our clients to watch this space as we move towards providing greater choice and return.