Times are tough, as the old adage goes, with global and domestic markets responding nervously to various factors, curbing risk appetite. For high-net-worth investors such conditions pose tantalizing questions about where to invest with the least risk and some guarantee of returns. For this, structured notes have always been an excellent option, yet they are not always fully understood by everyone.
To answer our questions, Paul de Waal, Director at Carrick Wealth, explains what structured notes are and why they are a good investment. Please note that these are Paul’s personal views and should not be construed as professional advice. As each person’s circumstances vary, one should always consult with a professional financial planner.
Paul, tell us more about what exactly structured notes are?
A structured note, also called structured products, quite simply put are vehicles that utilise financial instruments to create predetermined parameters for what investors can expect in return from their investment over a certain predetermined period of time. Your initial investment is protected and guaranteed, carries no currency risk and usually offers excellent tax treatment.
The typical structured note that Carrick offers its clients will include defined capital and income guarantees, together with offshore diversification by virtue of being linked to developed market equity indices. All the elements of the structured note are usually housed together and protected in a single capital-protected endowment policy.
What are the pros and cons of investing in a structured note?
A major advantage is that instead of a client having to search for investments of good value in the market or having to figure out which fund managers are likely to perform well, structured notes offer clients with predetermined, set parameters and possibilities without the risk involved when trying to do it yourself. Clients therefore only need to decide if these meet their expectations. However, if you move funds out before maturity of the investment period, they will not attract the full benefit, but the remaining funds will. While a minimum return is guaranteed, in many instances where the markets perform better than the quoted return, the larger benefit will come to the investor after tax adjustments.
Can you give us an example of such a structured note?
Yes, one particular structured note with an excellent offering that is now available and to which I refer my clients, is the Liberty Advanced Global Equity T2 note which is supported by Carrick, with Liberty being one of our product providers.
This note offer is available to individuals, trusts and companies between 3 June and 31 July 2019. A minimum lump sum investment of R250 000 invested for a 5-year term is required. It guarantees the investor a minimum net return of 9.5% p.a. for individuals and trusts and 8.54% for companies. Returns will be based on the portfolio being linked to the performance of the S&P 500 and the Euro Stoxx 50.
What happens if these markets perform worse or better than the quoted offer?
Regardless of their performance, your initial capital investment remains guaranteed and safe. If they perform better and the change in value, after tax adjustments, is greater than 9.50% p.a. in the case of individuals and trusts, or greater than 8.54% p.a. in the case of companies as long as the markets are positive over 5 years, the investor will receive the full growth benefit after adjustment for tax.
What other benefits are there?
Investments are made and paid out in South African rand, so there is no risk exposure to currency movements. For those wishing to invest larger amounts, investment allocation enhancements of 1% applies to lump sum investment amounts over R1-million and 2% in the case of lump sum investment amounts over R3-million. While the quoted returns are net of taxes and fees, the underlying investment wrapper is an endowment policy that offers an attractive tax-efficient option.
What about exposure to credit risk? Who guarantees the investment?
Liberty provides all aspects of the guarantee with the international banking giant, BNP Paribas, providing the underlying guarantees. PNB Paribas is the largest French bank, the largest bank in the Eurozone, and the world's 8th largest bank by total assets and currently operates in 77 countries. Because of its strength and position, it has a solid borrower’s balance sheet, thus limiting any credit risk.
Can anybody invest in a structured note in South Africa?
This depends on the terms and conditions of the note being offered. In the case of the Liberty note, subject to meeting the stipulated criteria, you can invest in it if you have a South African bank account.
How does one go about investing in a structured note?
Because there are many structured products available in the market – some better than others – it is always best to speak to a qualified financial adviser with experience of these products. Your adviser will tell you what is available, what the requirements are, what the benefits may be, and also what may be best suited to your specific portfolio.
If you wish to find out more about structured notes, you can contact Paul at [email protected].