“lately we have been using coupon-paying structures”

In this interview Michael Dahansenior vice president of the company KGIS Securities, explains the benefits of structured products in investment portfolios, focusing on diversification, risk management and customized solutions. The discussion covers performance measurement, asset allocation based on risk appetite, and the attractiveness of capital protection features.

What are the benefits of including structured products in an investment portfolio?

Structured products allow us to offer tailor-made investments to suit clients’ needs. The main benefit is to create liquid instruments that are attractive given market conditions and our view of a wide range of underlying assets.

Will these products help diversify risks?

Yes, structured products help diversify risk by allowing us to use a wide range of uncorrelated assets as underlying instruments. In addition, there are various structures that provide the possibility of protection against losses or even guarantee of the invested capital.

How do you measure the effectiveness of structured products? Is it the same as a fund or a stock, or is there more nuance to it?

Evaluating the effectiveness of a structured product has its own nuances. In many cases, these products cannot be directly compared to a benchmark, so evaluation often focuses on whether the original purpose of the note was achieved.

Typically, what percentage of customer portfolios are made up of these vehicles?

This percentage may vary depending on the underlying asset and the type of structure. We aim to hold no more than 5% of the portfolio in a particular product and no more than 25% in that type of investment vehicle.

Does the allocation increase or decrease depending on clients’ risk appetite?

In many cases, the allocation of structured products increases or decreases depending on the investor’s risk appetite. However, this is not always the case and largely depends on the type of structure, as some bonds are specifically designed to reduce risk and volatility (e.g. capital-backed structures).

Many structured products have a 100 percent guaranteed capital guarantee or a 90 percent guarantee, for example. Is this a key aspect for the end client and for you?

In some cases yes. For many investors, the ability to minimize or even eliminate downside risk is an important factor in their decision making. However, this is only attractive if the structure also offers a positive return scenario that compares favorably with other risk-free investments.

Can you give some examples of structured products that you currently use or have used recently?

We generally seek to use structures that benefit from current market conditions (volatility, interest rates, etc.). We have recently used coupon paying structures such as Phoenix Autocall or Reverse Convertible, and in some cases capital guaranteed notes, as we believe that at current valuations it makes sense to sacrifice some upside to minimize risk.