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Structured Investment Products: Bespoke solutions for a changeable market

Xavier Burkhardt

Leonteq Securities

Structured products can help HNW investors protect capital and participate in the upside potential of assets or markets. Leonteq Securities presented at the Thailand Wealth Management Forum to highlight their appeal in more changeable market conditions.

Xavier Burkhardt, executive director at Leonteq Securities (Leonteq) believes structured products (SPs) can help investors cope with changing market conditions, as they can be tailored to suit their market outlooks. 

“This is a newer type of investment solution for Thai clients, and we are helping institutional clients understand the opportunities and educate their customers on using SPs,” he explained. 

“SPs do not need to be overly complex structures,” he added, “as we can structure these in ways that are relatively easy to understand and that will help clients optimise their risk/return profile, meaning that they will reduce downside risk or improve upside potential.”

SPs are created from a combination of securities and derivatives packaged in a single-product. SPs are therefore tailor-made solutions that can be created in various asset class, such as equities, indices, mutual funds and ETFs, interest rates, foreign exchange (FX), commodities, hybrid instruments and so forth. 

 

SPs – customised by a global leader

Leonteq’s objective was to help demystify SPs and eradicate some of the popular misconceptions about them. Burkhardt explained that the attraction of SPs is that they can be customised to align directly the risk-return profile of the investors with their investment views. 

Crucially, he noted, they are not created by Leonteq based on any views the firm might have on the direction of any markets.

Leonteq is listed on the Stock Exchange in Switzerland, having been founded over 10 years ago and having evolved into a leading provider of investment solutions. Leonteq has around 500 employees globally in 11 offices. In Asia, the firm operate through Singapore and has an offshore presence in Hong Kong and Japan, operating region-wide through those hubs.  

The firm is an expert at creating products for financial institutions, mostly private banks, securities houses, who distribute them to their wealthy clients. Leonteq also creates SPs tailored for institutional clients such as the asset managers or insurance companies, for their own investment purposes.

“We issued more than 26,000 products last year,” Burkhardt told the audience. “So, we are one of the largest global issuers of structured products. We pride ourselves on outstanding technology, so we can create these customised SPs more efficiently.”

 

Different type of SPs

Burkhardt then explained briefly how SPs can be defined in three categories.  

The first is the capital protection SP; this is typically created on low volatile underlying assets, such as fixed income or balanced funds. It allows the investor to participate simply in the fund performance with a full capital protection. 

The second SP would be classified as yield enhancement product. It is usually used on volatile underlyings, such as equities, indices and commodities. “Investors will receive a fixed guaranteed coupon/yield (the upside), while combining a partial downside protection.” 

The third category is the participation product. It allows the investor to achieve more upside with the same downside risk inherent to underlying asset; or the same upside with less downside exposure. These products are usually equity replacement ideas. Burkhardt then introduced some ideas that might help in a more uncertain or volatile market environment. 

 

Ideas for a changing environment

The Lookback Tracker works best when the investor is long-term bullish but expects near-term volatility. 

“For example, Burkhardt explained, “it allows a client to remain invested in the equity market while also anticipating some near-term volatility. We might as an example have a 12-month certificate exposed to the Euro Stoxx 50 Index with a three months lookback. At maturity at the end of the first year in the first case the final value is 130, but the lowest level was 90%, so in fact your gain is 40%. And on the downside, if the market is going down you will strike at the lowest level, so even if the final performance is 80%, your lowest data over the first three months was 85%, meaning a loss of only minus5% and not minus20%.”

The second SP Burkhardt highlighted was the Inverse Fixed Coupon Note. “If you expect some market correction, using this SP will help you to extract some yield in the event the market falls, or if it stays at the same level.”

The third SP he highlighted is the Probation Autocall. This is a variation of the typical Fixed Coupon Note (FCN) except that Leonteq adds a feature that will help investors translate the product into a capital guarantee product. 

“It is quite attractive in this environment as we see most clients becoming more cautious.”

As all market perspectives can be expressed and reproduced through SPs, Burkhardt explained that a vital question the investor should be able to answer is what view he wants to express. “In any case,” he noted, “all our products are highly liquid, we offer a transparent secondary market and the SP price will fluctuate according to its underlying asset or assets.”

 

Leonteq: Promoting win-win solutions

Burkhardt noted that Leonteq suggests regular trade ideas based on third party research. “However,” he added, “we do not push products or trading views.” 

“We help the investors to implement their investment ideas,” Burkhardt explained, “and to optimise and identify which combination works for them, but they are the ones telling us their objectives and then we create a tailored product even for a small trade size.” To conclude, he reiterated the bespoke nature of their products. “The SPs and any other products we at Leonteq create must work for our valued clients. If not, those clients will lose out and we will lose our client confidence. It must be a win-win.” 

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