STRUCTURED products are investments that afford potential investors the opportunity to earn higher returns than those otherwise offered by traditional deposit products or bonds, as well as the chance to achieve increased portfolio diversification.

Structured investments are usually designed to produce returns that are dependent on the performance of particular underlying benchmarks such as interest rates, equity markets, commodities, corporate credits or foreign exchange markets. A structured investment can therefore be an equity-linked note, interest rate-linked note, currency-linked note or deposit, credit linked note or commodity-linked note.

Financial assets have been experiencing significant price fluctuations in 2015 (and perhaps will continue to do so for some time to come) on account of varying reasons stemming from ongoing speculation about the timing of the first interest rate increase by the US Central Bank since 2006, to concerns about slowing growth in China and the resultant drag on commodity prices and emerging market economies.

As such, structured notes can be used to help mitigate or offset some of the risks to portfolios that some financial assets pose.

Equity markets, for example, have been struggling to post consistent gains throughout 2015. S&P 500, for instance, which advanced 11 per cent last year had declined by roughly 7 per cent as of the end of September. Similarly the DOW, which gained 7.5 per cent in 2014, was in negative territory in the region of 9.0 per cent as at September 30th.

An investor that has exposure to equities, whether through direct purchases, or indirectly through bonds could consider investing in an equity linked structure note. In so doing the investor has the opportunity to enhance returns and help to offset some losses on his or her portfolio whilst gaining some level of protection on any further downward movement in equity prices.

A Credit Suisse-issued structured note linked to the performance of the S&P 500 and Russell 2000 indices, for instance, offered clients the opportunity to earn an attractive return of 7.0 per cent for a 3-year period as long as neither index fell by more than 30 per cent of its strike level (index level at time of issuance) on any quarterly observation date.

Additionally, clients should receive full repayment of principal, provided that neither index falls beyond 30 per cent of its strike level. An investor with a bearish view on equities can also capitalise on this note so long as the equity markets do not experience a major correction in excess of 30 per cent (which has not happened since the onset of the financial crisis in 2007).

Similarly, an investor wishing to hedge some exposure to oil and/ or having a bearish view on the commodity could consider an oil-related structured note. Consider this, JP Morgan 10 per cent contingent coupon four-year auto-callable oil index note. The note pays a 10 per cent coupon rate on a quarterly basis provided that the oil index is at or above 60 per cent of its strike level.

Additionally, based on the auto-call feature, JP Morgan is obliged to repay principal in full on any quarterly coupon payment date if the oil index is above its initial strike level. If the note, however, failed to be “auto-called” because oil prices fell, JP Morgan will repay the note in full at maturity so long as oil prices do not fall by more than 40 per cent and the note will continue to accrue at 10 per cent per annum provided that oil prices (which have already fallen in excess of 60 per cent since mid-2014) do not drop by an additional 40 per cent (perhaps highly unlikely).

Structured products can therefore be an attractive addition to your portfolio as they give you the flexibility to tailor an investment structure to meet your specific financial objectives — taking into consideration such factors as your goals, risk tolerance and time horizon. You are also able to incorporate non-standard features into

these investments, including principal protection, exposure to less accessible markets and/or indices, options and swaps. Some of these additional features, however, may carry extra risks or charges.

Risks involved in structured products are among the following:

* credit risk — structured products are unsecured debt issued by international investment banks and therefore the prospects for principal repayment is also contingent on the credit worthiness of the issuing investment bank.

* lack of liquidity — structured products rarely trade after issuance and anyone looking to sell a structured product before maturity should expect to sell it at a significant discount. They are therefore usually “buy and hold to maturity” investments.

* lack of standardisation — there is no uniform standard for pricing, and structured products are essentially priced using a best-guess approach.

* principal investment may be guaranteed but returns are not, as returns are based on the performance of the underlying instrument within the particular structure.

Alas, structured products are not suitable for everyone and are usually reserved for high net worth individuals and institutional clients due to their complexities, deal sizes and inherent risks. However, before making a decision to invest in a structured product, be sure to discuss this first with your investment banking adviser or financial planner. S/he will review your personal circumstances, risk tolerance, financial needs and objectives in order to determine whether a structured product would best meet your needs.

As structured products tend to be quite complex, it is important for you to understand the product you are investing in, including its risks.

Eugene Stanley is vice president of Fixed Income & Foreign Exchange at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm