FINANCIAL INVESTMENT: INVESTING IN STRUCTURED PRODUCTS
Structured products can find their place in the portfolios of retail investors in the medium-long term, as long as they are well understood, because they are relatively complex products whose method of calculation, the mechanisms put in place and their consequences. Decryption and advice.
These are capital loss risk-adjusted investments that meet the needs of investors based on market conditions. The operating conditions are clearly defined in the detailed prospectus of the offer. Structured products may offer higher return expectations than euro funds with a capital guarantee or level of protection that makes them less risky than an equity investment.
CHARACTERISTICS OF STRUCTURED PRODUCTS
Structured products necessarily include:
The structured product has a maturity and a limited life
The product has a fixed life, often supplemented by a prepayment mechanism that activates automatically if the performance of the underlying since the initial recognition date is positive or nil at one of the fixed reporting dates (they are often annual or semi-annual).
The performance of the structured product defined according to a mathematical formula
In case of realization of a market scenario, a performance higher than the risk-free rate is foreseen. This performance may be paid in the form of periodic coupons or a redemption premium at maturity. The structured product may also provide for an early repayment system if the underlying (index, share, etc.) registers during the life of the product on a pre-determined recognition date (annual, semi-annual, etc.). ) a positive or zero performance since the beginning.
If, at the maturity of the product, the market scenario has not been realized, the investor receives all of his capital, provided that the reference market has not experienced a fall above a limit fixed at ‘origin. Otherwise, the investor incurs a capital loss equal to the entire decline in the asset.
A capital protection guarantee integrated into the structured product
Structured products include a capital protection guarantee, partial or total.
Structured products can be integrated into a life insurance policy via the units of account, a PEA or a securities account.
EXAMPLE OF A STRUCTURED PRODUCT: VALLOUREC PRIVILEGE JUNE 2015
The reimbursement of the “Vallourec Privilege June 2015” product is conditional on the change in Vallourec’s share, dividends not reinvested. This type of product belongs to the category of auto calls. “Autocall” means that the issuer reserves the right to recall the product on its anniversary date with a fixed performance percentage of 10% per year for that structured product.
Automatic prepayment mechanism linked to Vallourec share performance
From year 1 to 6, at each annual recognition date, as soon as the performance of Vallourec Share since the initial recognition date (June 30, 2015) is positive or zero, an early repayment mechanism is activated. The investor receives, on the early redemption date, all of its initial capital and the coupon of 10% per year since the beginning (ie a maximum of 9.78%).
The favorable scenario at maturity if no fall in Vallourec share above 40%
If at maturity, on June 5, 2023, the Vallourec share has not decreased by more than 40% compared to its level of June 30, 2015 (initial recognition date), the investor receives on July 7, 2022, the entire capital + 7 coupons of 10% (a gain of 70% and a TRA of 7.85%).
The unfavorable scenario at maturity if Vallourec share falls below 40%
In the event of a sharp fall of the Vallourec share above 40% compared to its level of June 30, 2015 (initial recognition date), the investor will incur a capital loss equal to the entirety of the recorded decrease. by the action.
DIFFERENTIATE THE RISKS ASSOCIATED WITH STRUCTURED PRODUCTS
Default risk of the issuer or distributor of the structured product
The unsecured structured product arises from the fact that if the issuer files the balance sheet (the bank and this is an assumption to be taken into account), the company that distributes the structured product will have an outstanding debt. In this case, as the ultimate carrier, you would also suffer this failure. If you hold the structured product through a life insurance policy, it would be the failure of a unit of account. In this case, there is often no guarantee of space because we fall into the insurance code.
So you have to take into account the two notions of guaranteed capital if you are interested in structured products, namely:
- the guarantee of the product itself (depending on the specific conditions of each structured product);
- the guarantee of the issuer that structures this product, which represents two different risks.
The liquidity risk present with structured products
Note also that structured products are illiquid, even if there is a secondary market to sell when needed, often with a relatively long investment period (usually up to 10 years); even if, in the event of a favorable scenario (if the performance of the underlying since the initial recognition date is positive or nil at one of the fixed fixing dates), a quick exit after one year is possible.
The structured product: a financial product that does not belong to magic or miracle
Also, remember that structured products are not miracle products that guarantee superior risk-free performance. These are derivatives whose upward or downward movements in the underlying may be favorable or unfavorable to the investor depending on the extent of the variations and the mathematical formula provided by the structured product. Structured products only change the return and risk profiles to suit investors’ preferences and market views. In no case do they increase the returns of an asset class without additional risk-taking?
BENEFIT FROM THE BENEFITS OF THE STRUCTURED PRODUCT
The accessibility of structured products listed on the Paris Stock Exchange
Structured products are products listed on Euronext Paris and listed on the Paris Stock Exchange. They are easily acquired from your bank or broker. They are available on different envelopes: PEA, securities account, life insurance according to the issuer who offers it.
Diversification enabled by the large selection of underlying structured products
Given the great potential for underlying, structured products allow investors to diversify their portfolios, through the variety of asset classes available to them: stock indexes, baskets of securities and they may even have funds.
Optimizing the return-risk ratio at the heart of the structured products strategy
Structured products make it possible to develop a maximum optimization of the couple-risk return. As such, they constitute attractive diversification solutions, allowing to increase the income of the inheritance while limiting the risks, especially with an option of partial or total protection of the capital. This protection is obtained in return for less participation in the event of a rise in the markets. With lower losses in some cases and capped gains in others, structured products can be an attractive alternative to investing directly. They are all the more interesting when markets are heckled or the investor wants to reduce the size of the stock.
Let’s take an example and compare the investment in a structured product and the investment in an ETF with the same underlying: let’s imagine that you invest in a structured product whose underlying is the CAC 40 and that the maturity of the product is 1 year (this example is for educational purposes only).
If when the year has passed, the CAC 40 has increased 12%, you will get again for an example of 7% only. This case is less interesting for you than a direct investment because, indeed, if you had invested on an ETF CAC 40, you could have benefited from the increase of 12%.
Now imagine that after 1 year, the CAC 40 shows a decline of 22% and assume that the mathematical formula of your structured products provides a return of zero if the index falls by no more than 25%. Your capital is therefore protected and you recover the entire invested capital. This case is much more interesting for the investor than a direct investment via an ETF CAC 40. Indeed, you would have suffered a drop of 22%.
Now imagine the worst case for the investor: after one year, the CAC 40 has lost -30%. You experience a capital loss equal to the decline of the index, as in the case of a direct investment in the index via an ETF CAC 40. In this case, the investment via a structured product or well via a tracker returns for the same investor.
Structured products: tailor-made products to adapt to investors’ strategies
Structured products can also be adapted to meet the needs of investors looking for a product that outperforms the euro funds and with a reasonable return/risk ratio. You can also build your own structured product based on market conditions, sentiment and risk aversion. For example, there are structured products on the EUR / USD or on legacy funds like Europe, Carmignac Patrimoine, and M & G Optimal Income. For this, we must count a starting bet of at least 500,000 euros but wealth managers can pool the assets of their customers to wait for this minimum. In the case of a standardized structured product, the entry ticket is much lower: from 1 000 euros generally.
STRUCTURED PRODUCTS: AN ATTRACTIVE FINANCIAL INVESTMENT PROVIDED IT IS WELL UNDERSTOOD BY THE INVESTOR AND COINCIDES WITH HIS INVESTMENT SCENARIO
A structured, well-constructed product is an excellent financial instrument for the retail investor as it allows for lower risk provided that performance generally capped at 1 digit (in the range of 6% to 8% per year). In the current context, one could even consider that structured products are safe to havens.