The economic downturn, and the heightened levels of uncertainty it created for investors in the second half of the year, deterred HNWIs from increasing their allocations to alternative investment vehicles -- which included structured products.
HNWI allocations to alternative investments were shaped by the balance between the uncertainty spurred by the economic turmoil and the strong performances of select products within that asset class. Ultimately, HNWIs trimmed their allocations to alternative
investments by a single percentage point, from 10% of their financial assets in 2006 to 9% in 2007.
Counterbalancing HNWI concerns, growth opportunities developed as a result of shifting economic strengths. For instance, gold, among other commodities, gained popularity as a hedge against inflation and the sliding U.S. dollar, boosting gold futures by 31.4% in 2007.
Additionally, various hedge funds froze client withdrawals starting in late 2007, which helped minimize reductions in allocations to alternative investments.
Globally, hedge funds represented the largest portion—over 30%—of alternative investments.
During the course ofthe year, HNWIs seemed to grow more distrustful of hedge funds as subprime mortgage-related turmoil intensified.
The collapse of two Bear Stearns hedge funds, resulting from losses stemming from highly leveraged mortgage-backed security positions, deepened investors’ concerns over participation in hedge funds, limited pricing transparency and the investment vehicles they were likely to impact.
Ultimately, however, hedge funds’ average gains of 12.6% in 2007 were enough to outweigh HNWIs’ worries. Consequently, HNWIs made only slight adjustments to their overall allocations
to alternative investments.
The full report can be accessed on the CapGemini website by clicking here and registering.
SPA-2008
Wednesday, June 25, 2008
Bloomberg: Winning Converts (November 2007)
Reverse convertibles and other structured investments promise to boost returns and limit risks.
By Michael Iver and Jon Asmundsson
(Bloomberg Magazine, November 2007) -- In the years after the dot-com bubble burst in 2000, U.S. investors were hungry for anything that could give their portfolios a boost—or at least stanch the bleeding. Stocks plunged. The Standard & Poor’s 500 Index lost half of its value from its 2000 peak to its low in 2002. Bonds or money markets didn’t look much better. Yields on Treasuries fell to the lowest in four decades.
There was nowhere to hide . . . and a new class of securities gained a foothold on Wall Street. Managers of assets for high-net worth investors led the trend, offering debt instruments designed to mimic derivatives- based strategies. These securities promised a way to limit losses and enhance returns, and they became known as “structured” investments.
“Around 2000–2003, structured products became very prominent in portfolios of private banks such as JPMorgan and Merrill Lynch and Morgan Stanley,” the Structured Products Association said in a report on the subject. The new approach “was so useful that they started mass marketing it for retail investors at minimums of $1,000,” it says.
Protecting against further drops in the stock market was key, says Rhian Horgan, global head of equity derivatives at JPMorgan Chase & Co.’s private banking arm, which oversees $430 billion for its clients, who include more than 180 billionaires. Investors hurt by the S&P 500 Index’s slide from 1,553 to 769 wanted protection before they would even consider buying stocks again. “So we started putting together strategies that gave clients some protection on the next 10 percent downside in the equity market, and they financed that by selling away the upside above 14–15 percent annualized returns,” Horgan says.
For the full feature in Bloomberg Magazine, click here.
By Michael Iver and Jon Asmundsson
(Bloomberg Magazine, November 2007) -- In the years after the dot-com bubble burst in 2000, U.S. investors were hungry for anything that could give their portfolios a boost—or at least stanch the bleeding. Stocks plunged. The Standard & Poor’s 500 Index lost half of its value from its 2000 peak to its low in 2002. Bonds or money markets didn’t look much better. Yields on Treasuries fell to the lowest in four decades.
There was nowhere to hide . . . and a new class of securities gained a foothold on Wall Street. Managers of assets for high-net worth investors led the trend, offering debt instruments designed to mimic derivatives- based strategies. These securities promised a way to limit losses and enhance returns, and they became known as “structured” investments.
“Around 2000–2003, structured products became very prominent in portfolios of private banks such as JPMorgan and Merrill Lynch and Morgan Stanley,” the Structured Products Association said in a report on the subject. The new approach “was so useful that they started mass marketing it for retail investors at minimums of $1,000,” it says.
Protecting against further drops in the stock market was key, says Rhian Horgan, global head of equity derivatives at JPMorgan Chase & Co.’s private banking arm, which oversees $430 billion for its clients, who include more than 180 billionaires. Investors hurt by the S&P 500 Index’s slide from 1,553 to 769 wanted protection before they would even consider buying stocks again. “So we started putting together strategies that gave clients some protection on the next 10 percent downside in the equity market, and they financed that by selling away the upside above 14–15 percent annualized returns,” Horgan says.
For the full feature in Bloomberg Magazine, click here.
Tuesday, June 24, 2008
Australia: Capital Protected Products on the Rise (Investor Daily)
Greater competition between issuers
By Victoria Papandrea
SYDNEY, Australia -- The take-up of capital protected structured products in Australia has increased over the past few years along with the competition between issuers.
There was around $4 billion dollars worth of 100 per cent capital guaranteed products sold to Australian investors in 2007.
This represented a 50 per cent growth in issuance of the products compared to 2006 figures, according to JPMorgan vice president equity derivatives and structured products David Jones-Prichard.
"One of the reasons for that was an increase in the quality of the products we've seen over the last two to three years in Australia," he said.
"We've really started to see more flexibility, versatility and just a much more expansive and innovative range of structured products throughout the market as well as a lot of competition between issuers."
There is currently around a dozen issuers in the Australian market that are providing a variety of different structured products to Australian investors, Jones-Prichard said.
"There's also greater technology that's gone into the products so not only is there greater competition between the issuers but there's also greater call on our resources from our global desks," he said.
For the original article from Australia's Investor Daily, click here.
By Victoria Papandrea
SYDNEY, Australia -- The take-up of capital protected structured products in Australia has increased over the past few years along with the competition between issuers.
There was around $4 billion dollars worth of 100 per cent capital guaranteed products sold to Australian investors in 2007.
This represented a 50 per cent growth in issuance of the products compared to 2006 figures, according to JPMorgan vice president equity derivatives and structured products David Jones-Prichard.
"One of the reasons for that was an increase in the quality of the products we've seen over the last two to three years in Australia," he said.
"We've really started to see more flexibility, versatility and just a much more expansive and innovative range of structured products throughout the market as well as a lot of competition between issuers."
There is currently around a dozen issuers in the Australian market that are providing a variety of different structured products to Australian investors, Jones-Prichard said.
"There's also greater technology that's gone into the products so not only is there greater competition between the issuers but there's also greater call on our resources from our global desks," he said.
For the original article from Australia's Investor Daily, click here.
Sunday, June 22, 2008
India: Wealthy Investors Exit Stocks, Seek Protected Exposure to Nifty-50
From The Economic Times (India).
As the tides have turned, many well-heeled investors are moving out of stocks to park some of their money in structured products which are linked to leading market benchmarks.
Structured products, offered by banks and brokerages, have taken off in the last two years. But now with the Sensex having lost over 5,000 points from its peak, securities houses are sensing a greater demand for such products in the last few months.
A foreign bank recently offered a 15-month tenor product with a Nifty participation of 160-170%, with a knockout barrier of 20%. Standard Chartered was the first to introduce a “cliquet” structure, wherein investors “lock-in” profits earned in each year. Given the way that markets are behaving, bankers are tweaking products.
Earlier products which participated on the upside found favour with investors, but today products which participate the market upside as well as the downside find appeal. Hence, popular structures today have a 20-30% participation on both the upside and downside, with tenures of 18-24 months.
Today banks like Citi, HSBC, Standard Chartered and private sector players such as ICICI, HDFC and brokerages such as Emkay, Motilal Oswal, Edelweiss sell these products to their high net worth clients.
The minimum ticket size for these products is Rs 10-20 lakh. “A lot of HNI clients who do not want to risk their capital and want a slice of capital market returns opt for capital-guaranteed products,” says Abhay Aima, group head, Private Banking and Third Party Products, HDFC Bank.
For full article from The Economic Times (India), click here.
As the tides have turned, many well-heeled investors are moving out of stocks to park some of their money in structured products which are linked to leading market benchmarks.
Structured products, offered by banks and brokerages, have taken off in the last two years. But now with the Sensex having lost over 5,000 points from its peak, securities houses are sensing a greater demand for such products in the last few months.
A foreign bank recently offered a 15-month tenor product with a Nifty participation of 160-170%, with a knockout barrier of 20%. Standard Chartered was the first to introduce a “cliquet” structure, wherein investors “lock-in” profits earned in each year. Given the way that markets are behaving, bankers are tweaking products.
Earlier products which participated on the upside found favour with investors, but today products which participate the market upside as well as the downside find appeal. Hence, popular structures today have a 20-30% participation on both the upside and downside, with tenures of 18-24 months.
Today banks like Citi, HSBC, Standard Chartered and private sector players such as ICICI, HDFC and brokerages such as Emkay, Motilal Oswal, Edelweiss sell these products to their high net worth clients.
The minimum ticket size for these products is Rs 10-20 lakh. “A lot of HNI clients who do not want to risk their capital and want a slice of capital market returns opt for capital-guaranteed products,” says Abhay Aima, group head, Private Banking and Third Party Products, HDFC Bank.
For full article from The Economic Times (India), click here.
MSNBC: Energy Speculation Lead to Obama's Call to Close "Enron Loophole"
Obama campaign's said today that he plans to ease the impact of rising gas prices by cracking down on excessive energy speculation through closing the so-called “Enron Loophole.”
Aides argued the changes to the regulatory structures could have at least some medium-term impact on gas prices. The “Enron Loophole” -- so named because it was added at Enron’s behest -- has kept the Commodity Futures Trading Commission from fully overseeing the oil futures market and investigating cases where excessive speculation may be driving up oil prices, the campaign explained in a policy paper.
Obama would close the loophole by requiring that US energy futures trade on regulated exchanges. His plan also calls for legislation that would direct the CFTC to investigate whether further regulation is needed to end excessive speculation in US commodities markets, including higher margin requirements and position limits for institutional investors.
Obama would aim to ensure that US energy futures cannot be traded on unregulated offshore exchanges and would seek to work with our other countries to establish regulations to avoid excessive speculation in commodities futures markets. He would also call on the Federal Trade Commission to investigate market manipulation, including in the oil futures markets and ask the Justice Department to investigate whether energy traders have been engaged in illegal activities that have helped drive up oil and food prices.
Corzine said high oil prices were partly a result of increased demand from countries like China and India, but that most experts believed speculation was also a contributing factor and that the volatility in the price of oil on a daily basis was a clear indication of speculation in the marketplace.
“I think everyone believes there’s too much speculation in the oil markets and a lot it flows directly from that particular loophole,” he said. “"It might as well be called the Phil Gramm loophole, because it was snuck in at the 11th hour, 59th minute to the 2000 energy policy bill, and it just is, it really needs to be addressed. And it would have a lot of impact I think certainly in the intermediate term, if not in the short term with greater oversight here.”
Corzine said the "Enron loophole” Gramm had added to the bill took exchanges and derivative oil contracts out of supervisory oversight and had been a problem in electricity markets in California a few years ago. He said it was unlikely Gramm would push back against his own amendment.
For the full report, click here.
Aides argued the changes to the regulatory structures could have at least some medium-term impact on gas prices. The “Enron Loophole” -- so named because it was added at Enron’s behest -- has kept the Commodity Futures Trading Commission from fully overseeing the oil futures market and investigating cases where excessive speculation may be driving up oil prices, the campaign explained in a policy paper.
Obama would close the loophole by requiring that US energy futures trade on regulated exchanges. His plan also calls for legislation that would direct the CFTC to investigate whether further regulation is needed to end excessive speculation in US commodities markets, including higher margin requirements and position limits for institutional investors.
Obama would aim to ensure that US energy futures cannot be traded on unregulated offshore exchanges and would seek to work with our other countries to establish regulations to avoid excessive speculation in commodities futures markets. He would also call on the Federal Trade Commission to investigate market manipulation, including in the oil futures markets and ask the Justice Department to investigate whether energy traders have been engaged in illegal activities that have helped drive up oil and food prices.
Corzine said high oil prices were partly a result of increased demand from countries like China and India, but that most experts believed speculation was also a contributing factor and that the volatility in the price of oil on a daily basis was a clear indication of speculation in the marketplace.
“I think everyone believes there’s too much speculation in the oil markets and a lot it flows directly from that particular loophole,” he said. “"It might as well be called the Phil Gramm loophole, because it was snuck in at the 11th hour, 59th minute to the 2000 energy policy bill, and it just is, it really needs to be addressed. And it would have a lot of impact I think certainly in the intermediate term, if not in the short term with greater oversight here.”
Corzine said the "Enron loophole” Gramm had added to the bill took exchanges and derivative oil contracts out of supervisory oversight and had been a problem in electricity markets in California a few years ago. He said it was unlikely Gramm would push back against his own amendment.
For the full report, click here.
UK Guardian: Protected Plans "Don't Set My Pulse Racing"
Structured investment plans
"These each-way bets don't set my pulse racing," says the Guardian's Paul Farrow
They don't have the sexiest name, but that is not stopping investors from lapping them up.
Structured investment plans, which are linked to stock market indices or a basket of shares and guarantee either full or partial capital protection, often prosper during times of uncertainty. And with the all the gloom and doom, they are enjoying a boom. They are on course for a record year in terms of sales.
This comes as no surprise. Providers will always try to cash in on the prevailing mood of investors. And, boy, are they cashing in.
Whether they are linked to agriculture, Africa, China or even bombed-out banking shares, new structured plans are coming thick and fast.
I'm sure that many investors will be tempted by the latest offering from James Hay, which is a five-year plan linked to four banking shares with full capital protection - although HBOS is not one of the four. But investing in structured products is a little like betting on a horse race with an each-way wager and ending up with a second or third placed win, rather than a victory. And the trouble with an each-way bet is that, with a tinge of regret, you are often left thinking of what might have been – and whether the smaller win was worth the effort in the first place.
For the full article, click here.
"These each-way bets don't set my pulse racing," says the Guardian's Paul Farrow
They don't have the sexiest name, but that is not stopping investors from lapping them up.
Structured investment plans, which are linked to stock market indices or a basket of shares and guarantee either full or partial capital protection, often prosper during times of uncertainty. And with the all the gloom and doom, they are enjoying a boom. They are on course for a record year in terms of sales.
This comes as no surprise. Providers will always try to cash in on the prevailing mood of investors. And, boy, are they cashing in.
Whether they are linked to agriculture, Africa, China or even bombed-out banking shares, new structured plans are coming thick and fast.
I'm sure that many investors will be tempted by the latest offering from James Hay, which is a five-year plan linked to four banking shares with full capital protection - although HBOS is not one of the four. But investing in structured products is a little like betting on a horse race with an each-way wager and ending up with a second or third placed win, rather than a victory. And the trouble with an each-way bet is that, with a tinge of regret, you are often left thinking of what might have been – and whether the smaller win was worth the effort in the first place.
For the full article, click here.
Saturday, June 21, 2008
Business Week: A Note Tailor-Made to Fit Your Goal
By Ben Levisohn
BW Magazine
They're the bespoke suits of the investment world—financial products that can be designed to meet almost any investing goal. They don't look so fancy at first glance. They're bonds, basically, backed by a bank. It's the financial accoutrements layered on that basic frame that distinguish these products and lead to their name: structured notes.
Most of these products share a common foundation in pairing a Treasury or corporate bond with an options contract; the option bets on the direction of a stock or stock index over time. The above-average income some products offer is part of their appeal in a low-rate environment. But it's the options contracts that give a "have your cake and eat it too" aspect to the deal. While enjoying steady income, investors can maintain exposure to the stock market and cap potential losses—and, in a trade-off some notes require, gains.
The use of structured products has grown rapidly, with their total value more than quadrupling, from $28 billion in 2003 to $114 billion in 2007. About half of that $114 billion was sold to individuals by brokers or financial advisers. The number of notes is growing as well. In May, 2007, there were 437 structured products aimed at individual investors, valued at $2.4 billion; in May, 2008, there were 634, with a total value of $4.2 billion, according to data from StructuredRetailProducts.com.
While it's smart to be wary when pitched complex products, it's easy to see why more investors are intrigued. The notes can be designed for almost any goal, from protecting retirement dollars to aiming aggressively at high returns. "There's a seemingly endless amount of them out there," says adviser Brent McQuiston of Scottsdale-based Wealth Trust-Arizona.
Principal protection notes, geared to insure against market losses, are popular now. They let you participate in some of the upside of a stock index, and if the index drops, you don't take a loss. "Investors don't want to lose money, even if it means giving up some gains," says Neel Tiku, a financial planner at Peak Financial Management in Waltham, Mass.
Notes that offer double-digit yields, but come with far higher risks than typical fixed-income products, are also strong sellers.
For the full article in Business Week, click here.
BW Magazine
They're the bespoke suits of the investment world—financial products that can be designed to meet almost any investing goal. They don't look so fancy at first glance. They're bonds, basically, backed by a bank. It's the financial accoutrements layered on that basic frame that distinguish these products and lead to their name: structured notes.
Most of these products share a common foundation in pairing a Treasury or corporate bond with an options contract; the option bets on the direction of a stock or stock index over time. The above-average income some products offer is part of their appeal in a low-rate environment. But it's the options contracts that give a "have your cake and eat it too" aspect to the deal. While enjoying steady income, investors can maintain exposure to the stock market and cap potential losses—and, in a trade-off some notes require, gains.The use of structured products has grown rapidly, with their total value more than quadrupling, from $28 billion in 2003 to $114 billion in 2007. About half of that $114 billion was sold to individuals by brokers or financial advisers. The number of notes is growing as well. In May, 2007, there were 437 structured products aimed at individual investors, valued at $2.4 billion; in May, 2008, there were 634, with a total value of $4.2 billion, according to data from StructuredRetailProducts.com.
While it's smart to be wary when pitched complex products, it's easy to see why more investors are intrigued. The notes can be designed for almost any goal, from protecting retirement dollars to aiming aggressively at high returns. "There's a seemingly endless amount of them out there," says adviser Brent McQuiston of Scottsdale-based Wealth Trust-Arizona.
Principal protection notes, geared to insure against market losses, are popular now. They let you participate in some of the upside of a stock index, and if the index drops, you don't take a loss. "Investors don't want to lose money, even if it means giving up some gains," says Neel Tiku, a financial planner at Peak Financial Management in Waltham, Mass.
Notes that offer double-digit yields, but come with far higher risks than typical fixed-income products, are also strong sellers.
For the full article in Business Week, click here.
Cerulli: SPs, Alternatives Draining Mutual Fund AUMs
Tide Shifts for Open-End Mutual Fund Market
Rebecca Moore, PlanAdviser.com
For the first time since their creation, open-end mutual fund launches were eclipsed by the combined introductions of ETFs, closed-end funds, and variable annuities in 2007.
A report from Cerulli Associates said the cumulative impact of these and other alternative vehicles, including structured products, funds of funds, and collective and commingled trusts, poses a significant threat to the open-end mutual fund market. Cerulli contends that fresh thinking about Modern Portfolio Theory (MPT) is influencing product development and spawning an array of new alternative investment strategies and asset classes structured as both 1940-Act and non-mutual fund products.
The increased availability of alternative strategies is challenging product marketers as they seek to position their funds amid evolving portfolio construction. Nearly two-thirds of asset managers report that the evolution of portfolio construction and Modern Portfolio Theory is having a large impact on their retail third-party product development strategy. This evolution in thinking—coupled with Baby Boomers’ changing needs as they shift into retirement mode—is influencing the portfolio construction of both new and established products, Cerulli notes.
The changes are also influencing which products and strategies distributors use to meet their clients' needs, and ultimately which products gather and retain assets, Cerulli said. The report says changes to the underlying construction of products is shaping how advisers and platforms construct client portfolios, as well as the demand for certain products and strategies.
For the full story from PlanAdviser.com, click here.
For a copy of the Cerulli report: "Product Development in an Evolving Portfolio Construction Environment," call 617.437.0084 or email CAmarketing@cerulli.com.
Rebecca Moore, PlanAdviser.com
For the first time since their creation, open-end mutual fund launches were eclipsed by the combined introductions of ETFs, closed-end funds, and variable annuities in 2007.
A report from Cerulli Associates said the cumulative impact of these and other alternative vehicles, including structured products, funds of funds, and collective and commingled trusts, poses a significant threat to the open-end mutual fund market. Cerulli contends that fresh thinking about Modern Portfolio Theory (MPT) is influencing product development and spawning an array of new alternative investment strategies and asset classes structured as both 1940-Act and non-mutual fund products.
The increased availability of alternative strategies is challenging product marketers as they seek to position their funds amid evolving portfolio construction. Nearly two-thirds of asset managers report that the evolution of portfolio construction and Modern Portfolio Theory is having a large impact on their retail third-party product development strategy. This evolution in thinking—coupled with Baby Boomers’ changing needs as they shift into retirement mode—is influencing the portfolio construction of both new and established products, Cerulli notes.
The changes are also influencing which products and strategies distributors use to meet their clients' needs, and ultimately which products gather and retain assets, Cerulli said. The report says changes to the underlying construction of products is shaping how advisers and platforms construct client portfolios, as well as the demand for certain products and strategies.
For the full story from PlanAdviser.com, click here.
For a copy of the Cerulli report: "Product Development in an Evolving Portfolio Construction Environment," call 617.437.0084 or email CAmarketing@cerulli.com.
Thursday, June 19, 2008
Press Release: LaSalle Team Sets Up Shop at ICAP
From left to right: John Tessar, Chris White, John Korody, Eric Moskoff, Alex Ciccotelli, Krista Martin, Ed Coach ICAP's new structured product services division, SPX, is headed by John Tessar and Ed Coach, and is based in Boca Raton, FL. John and Ed are joined by former LaSalle colleagues Krista Martin, John Korody and Eric Moskoff and look to build on the success they experienced while at LaSalle. In addition, Chris White from Countrywide Securities Corp. and Alex Ciccotelli from HSBC Bank USA, join the division this month. ====
BOCA RATON, FL (From the ICAP Press Release) -- It has been widely reported that Structured Product distribution has experienced explosive growth over the past several years in the U.S. This growth has led to great change, evolution and opportunity within our industry.
In that light, we are proud to announce that the former structured products team from LaSalle Bank has joined ICAP, the world's premier voice and electronic interdealer broker. ICAP delivers specialist intermediary broking services to trading professionals in the wholesale financial markets. The group covers a very broad range of OTC (over-the-counter) financial products and services in commodities, foreign exchange, interest rates, credit and equity markets, as well as data, commentary and indices.
Through the SPX platform, our team plans to offer issuers and the broker dealer community enhanced structured products education, information and trading services. Focusing solely on the distribution of structured products to the dealer and advisor community, our team hopes to capitalize on the growing demand for structured products by U.S. investors.
SPX Co-heads John Tessar & Ed Coach said in a joint statement, "Our success will most certainly be gauged by how well we can address the needs of both issuers and dealers. As we grow, we hope to help the entire investment community to learn, find and buy a variety of structured products from a vast array of issuers. We very much look forward to working with you in the near future."
SPX - Structured Product Services
2255 Glades Road, Suite 200E
Boca Raton, FL 33431
888-308-2024
spx@icap.com
Friday, June 13, 2008
Skandia UK: With 152% Increase, Protection Proves Popular
13 June 2008
Structured products are proving a popular solution for those who are nervous about equity investments following stock market volatility.
Structured products are an alternative investment solution for investors who are concerned about losing their capital.
Figures from Skandia show a 152 per cent increase in inflows into its Protected Portfolio Investment (PPI) during the first quarter of 2008 compared to the same period in 2007.
Investors can build a portfolio of funds based on a long-term strategic asset allocation that is in line with their individual risk profile, investment objective and time frame.
Another option is a structured product that enables them to benefit from some of the investment growth but with the added reassurance that their capital is protected against any downturn.
Skandia’s protected portfolio investments are structured to maximise the opportunities for growth alongside security of capital. Unlike the majority of structured products available in the market, actively managed funds are used to determine growth rather than passive indices. So when market conditions start to improve, investors will still have the potential to benefit from stock market growth.
Graham Bentley, head of investment marketing at Skandia, says, ‘The key principle of any investment strategy is understanding attitudes to risk, and for some investors an investment that allows them to enjoy growth should markets rise, with a safety net of up to 100 per cent capital protection at the end of the investment term should markets fall, suits their risk needs.
‘The recent market volatility is clearly making the idea of protecting their initial investment even more appealing to many investors and, as a result, over the last quarter we have seen significant interest in our structured products.’
Structured products are proving a popular solution for those who are nervous about equity investments following stock market volatility.
Structured products are an alternative investment solution for investors who are concerned about losing their capital.
Figures from Skandia show a 152 per cent increase in inflows into its Protected Portfolio Investment (PPI) during the first quarter of 2008 compared to the same period in 2007.
Investors can build a portfolio of funds based on a long-term strategic asset allocation that is in line with their individual risk profile, investment objective and time frame.
Another option is a structured product that enables them to benefit from some of the investment growth but with the added reassurance that their capital is protected against any downturn.
Skandia’s protected portfolio investments are structured to maximise the opportunities for growth alongside security of capital. Unlike the majority of structured products available in the market, actively managed funds are used to determine growth rather than passive indices. So when market conditions start to improve, investors will still have the potential to benefit from stock market growth.
Graham Bentley, head of investment marketing at Skandia, says, ‘The key principle of any investment strategy is understanding attitudes to risk, and for some investors an investment that allows them to enjoy growth should markets rise, with a safety net of up to 100 per cent capital protection at the end of the investment term should markets fall, suits their risk needs.
‘The recent market volatility is clearly making the idea of protecting their initial investment even more appealing to many investors and, as a result, over the last quarter we have seen significant interest in our structured products.’
Wednesday, June 11, 2008
Investopedia: Structured Retail Products Too Good To Be True?
by George D. Lambert
(Contact Author Biography)
Structured retail products promise a return tied to a portfolio's earnings and guarantee you'll get your original investment back - regardless of what happens to the market! And some even offer to pay double or triple an index's return. You might wonder whether there's a catch. Can there really be reward without risk? It would seem so - that is, until you look beneath the surface.
The financial institutions issuing structured retail products might invest in one or more stock indexes. For instance, these could include the DJIA, the S&P MidCap 400 Index, the S&P SmallCap 600 Index, the Dow Jones EURO STOXX 50 Index, or the Nikkei 225 Index. Some even offer products that are tied to a handful of stocks in one industry, such as the energy sector.
Who sells them? Several banks and brokerage firms offer structured retail products, each with a unique acronym, but the concepts are basically the same: If the underlying index or stock in the portfolio does well, you'll get a piece of the return. On the other hand, if the market tanks, you're assured to get all of your money back. Plus, they might throw in a little interest.
How They Work
One bank, for example, has a $1,000 five-year note that pays at maturity the greater of two amounts:
Your principal plus a 5% total return (0.98% annual), which comes out to: $1,050
A piece of the underlying portfolio's or index's return. The payout includes dividends, but it's credited quarterly and your account is charged for any losses in the index. At the end of each quarter, you'll get credit by calculating the:
Then, the level is reset for the following quarter. Your total return is the compounded value of the 20 (five years x four quarters) quarterly returns. The most you can make with this particular bank's product is 7% per quarter.
Compounded, that comes out to 31% a year - not too shabby. But what if the market doesn't go up every quarter during the year?
[Theoretically assume] the market had a 6.59% gain for the year. However, because of the way the earnings were credited with this bank's structured retail product, you would have actually lost 7.55%! You wouldn't have this problem, though, if the market stayed on a steady, upward course throughout the year.
How does the issuer protect your capital?
Since the financial institution promises to return your principal, it has to hedge against a drop in the underlying index. As a hypothetical example, imagine you invest $1,000 in a three-year structured retail product that is linked to the DJIA. The institution might put $865 of your money into a three-year zero-coupon bond that is set to grow to $1,000 at maturity. Therefore, if the index drops in value, the institution has the money to meet its obligation to you. Next, the institution uses the remaining $135 to buy call options on the DJIA. That way if the index rises, it'll get both the initial principal ($1,000) and profits related to the index's growth to share with you. But if the index falls, the call options will not be exercised and the investor will still have his initial $1,000.
Other Versions
There are products out there that have different payout caps, such as 90% of the S&P 500's return. You might also run across structured retail products that offer to pay a return at maturity that is a multiple of their underlying market index's return. However, the gains might be subject to limits, such as no more than a 30% total gain over two years, so don't expect to make a killing.
Furthermore, you might have to share in a portion of any decline in the index; therefore, you could get back less than your initial investment. (To read more about capital gains, see Capital Gains Tax Cuts For Middle Income Investors and A Long-Term Mindset Meets Dreaded Capital-Gains Tax.)
How They're Taxed
The tax rules for structured retail products are similar to those of zero-coupon bonds. Therefore, even though you don't actually receive the guaranteed interest each year, you'll pay annual tax on it at your ordinary tax rate (up to 35% federal). At maturity, if the account is up, you'll get another tax bill on the additional earnings.The RisksStructured retail products carry a few risks. Among them:
Neither the FDIC, nor any other government agency, guarantees the products, regardless of whether you bought them from your bank. They are unsecured obligations of the issuing financial institution. As a result, if the issuer goes down the tubes, your investment could, too.
Structured retail products are not redeemable prior to the maturity date. You can try to sell on the open market, but the price you get may be influenced by many factors, such as interest rates, volatility and the current level of the index. As a result, you might end up with a loss.
You won't receive any interest while you own the account.
Conclusion
Structured retail products are a little like certificates of deposit tied to stocks - you get some upside potential with a safety net in case the market takes a dive. Plus, whenever interest rates rise, the minimum promised returns might be an attractive alternative to traditional fixed-income investments, such as bonds. Nevertheless, there are restrictions, so make sure you understand the prospectus before you invest. Otherwise, you could be horrified to suddenly discover that you own an investment that goes down in an up market, and that you may not be able to sell it without taking a loss.
by George D. Lambert, (Contact Author Biography)
George D. Lambert is a freelance financial writer with more than 20 years of experience in the financial services industry. He has worked as a Certified Financial Planner, a Certified Divorce Financial Analyst and an arbitrator for the NASD, NYSE and AAA. George is approved by the Florida Licensing Education Section to instruct life, health and variable annuity courses. To read more about George and his services, visit www.e-financialWriter.com. Also be sure to check out his latest book, "A Boomer's Guide To Long-Term Care".
(Contact Author Biography)
Structured retail products promise a return tied to a portfolio's earnings and guarantee you'll get your original investment back - regardless of what happens to the market! And some even offer to pay double or triple an index's return. You might wonder whether there's a catch. Can there really be reward without risk? It would seem so - that is, until you look beneath the surface.
The financial institutions issuing structured retail products might invest in one or more stock indexes. For instance, these could include the DJIA, the S&P MidCap 400 Index, the S&P SmallCap 600 Index, the Dow Jones EURO STOXX 50 Index, or the Nikkei 225 Index. Some even offer products that are tied to a handful of stocks in one industry, such as the energy sector.
Who sells them? Several banks and brokerage firms offer structured retail products, each with a unique acronym, but the concepts are basically the same: If the underlying index or stock in the portfolio does well, you'll get a piece of the return. On the other hand, if the market tanks, you're assured to get all of your money back. Plus, they might throw in a little interest.
How They Work
One bank, for example, has a $1,000 five-year note that pays at maturity the greater of two amounts:
Your principal plus a 5% total return (0.98% annual), which comes out to: $1,050
A piece of the underlying portfolio's or index's return. The payout includes dividends, but it's credited quarterly and your account is charged for any losses in the index. At the end of each quarter, you'll get credit by calculating the:
Ending Level - Starting Level
______________________
Starting Level
Then, the level is reset for the following quarter. Your total return is the compounded value of the 20 (five years x four quarters) quarterly returns. The most you can make with this particular bank's product is 7% per quarter.
Compounded, that comes out to 31% a year - not too shabby. But what if the market doesn't go up every quarter during the year?
[Theoretically assume] the market had a 6.59% gain for the year. However, because of the way the earnings were credited with this bank's structured retail product, you would have actually lost 7.55%! You wouldn't have this problem, though, if the market stayed on a steady, upward course throughout the year.
How does the issuer protect your capital?
Since the financial institution promises to return your principal, it has to hedge against a drop in the underlying index. As a hypothetical example, imagine you invest $1,000 in a three-year structured retail product that is linked to the DJIA. The institution might put $865 of your money into a three-year zero-coupon bond that is set to grow to $1,000 at maturity. Therefore, if the index drops in value, the institution has the money to meet its obligation to you. Next, the institution uses the remaining $135 to buy call options on the DJIA. That way if the index rises, it'll get both the initial principal ($1,000) and profits related to the index's growth to share with you. But if the index falls, the call options will not be exercised and the investor will still have his initial $1,000.
Other Versions
There are products out there that have different payout caps, such as 90% of the S&P 500's return. You might also run across structured retail products that offer to pay a return at maturity that is a multiple of their underlying market index's return. However, the gains might be subject to limits, such as no more than a 30% total gain over two years, so don't expect to make a killing.
Furthermore, you might have to share in a portion of any decline in the index; therefore, you could get back less than your initial investment. (To read more about capital gains, see Capital Gains Tax Cuts For Middle Income Investors and A Long-Term Mindset Meets Dreaded Capital-Gains Tax.)
How They're Taxed
The tax rules for structured retail products are similar to those of zero-coupon bonds. Therefore, even though you don't actually receive the guaranteed interest each year, you'll pay annual tax on it at your ordinary tax rate (up to 35% federal). At maturity, if the account is up, you'll get another tax bill on the additional earnings.The RisksStructured retail products carry a few risks. Among them:
Neither the FDIC, nor any other government agency, guarantees the products, regardless of whether you bought them from your bank. They are unsecured obligations of the issuing financial institution. As a result, if the issuer goes down the tubes, your investment could, too.
Structured retail products are not redeemable prior to the maturity date. You can try to sell on the open market, but the price you get may be influenced by many factors, such as interest rates, volatility and the current level of the index. As a result, you might end up with a loss.
You won't receive any interest while you own the account.
Conclusion
Structured retail products are a little like certificates of deposit tied to stocks - you get some upside potential with a safety net in case the market takes a dive. Plus, whenever interest rates rise, the minimum promised returns might be an attractive alternative to traditional fixed-income investments, such as bonds. Nevertheless, there are restrictions, so make sure you understand the prospectus before you invest. Otherwise, you could be horrified to suddenly discover that you own an investment that goes down in an up market, and that you may not be able to sell it without taking a loss.
by George D. Lambert, (Contact Author Biography)
George D. Lambert is a freelance financial writer with more than 20 years of experience in the financial services industry. He has worked as a Certified Financial Planner, a Certified Divorce Financial Analyst and an arbitrator for the NASD, NYSE and AAA. George is approved by the Florida Licensing Education Section to instruct life, health and variable annuity courses. To read more about George and his services, visit www.e-financialWriter.com. Also be sure to check out his latest book, "A Boomer's Guide To Long-Term Care".
NASDAQ-SPA June 11 Meet-the-Press Event at NYC MarketSite
Panel members from the Second Annual NASDAQ-SPA Media Event on June 11, 2008 (left to right): Matt Ginsburg, Wells Fargo; Keith Styrcula, Structured Products Association; Karen Fang, Goldman Sachs; Philippe el-Asmar, Barclays Capital; Scott Mitchell, JPMorgan; John Radtke, InCapital; and Richard Keary, NASDAQ-OMX.
Special thanks to NASDAQ's Wayne Lee for the press availability. Photo by Rob Tannenbaum.
Structured Products Confused with CDOs - Investment News
By Dan Jamieson, June 11, 2008
NEW YORK - Sales of structured products continue to grow despite the fact that they are often confused with subprime-tainted collateralized debt obligations, said Keith Styrcula, chairman of the Structured Products Association at a media briefing today in New York.
“Half of all news alerts talk about CDOs as structured products,” he said. “They're not CDOs; they're not subprime.”
Ratings agencies have added to the confusion by calling some of their CDO-ratings groups “structured-products groups,” Mr. Styrcula said.
The confusion has also caused some compliance officers at brokerage firms to wonder whether investors are being sold mortgage-backed bonds, he said in an interview.
Sales of structured products are expected to reach $120 billion this year, surpassing the record $114 billion in sales in 2007, according to the Structured Products Association.
In 2006, sales were just $64 billion.
Retail buyers have been increasingly interested in products with downside protection and strong credit ratings, according to industry participants on a panel at the briefing.
About 16% of sales this year have been in commodity-linked products, up from 8% last year, said Philippe El-Asmar, managing director and head of structured-product sales at Barclays Capital, the New York-based investment-banking division of London-based Barclays Bank PLC.
To see the original version of the article, click here.
NEW YORK - Sales of structured products continue to grow despite the fact that they are often confused with subprime-tainted collateralized debt obligations, said Keith Styrcula, chairman of the Structured Products Association at a media briefing today in New York.
“Half of all news alerts talk about CDOs as structured products,” he said. “They're not CDOs; they're not subprime.”
Ratings agencies have added to the confusion by calling some of their CDO-ratings groups “structured-products groups,” Mr. Styrcula said.
The confusion has also caused some compliance officers at brokerage firms to wonder whether investors are being sold mortgage-backed bonds, he said in an interview.
Sales of structured products are expected to reach $120 billion this year, surpassing the record $114 billion in sales in 2007, according to the Structured Products Association.
In 2006, sales were just $64 billion.
Retail buyers have been increasingly interested in products with downside protection and strong credit ratings, according to industry participants on a panel at the briefing.
About 16% of sales this year have been in commodity-linked products, up from 8% last year, said Philippe El-Asmar, managing director and head of structured-product sales at Barclays Capital, the New York-based investment-banking division of London-based Barclays Bank PLC.
To see the original version of the article, click here.
The Fever for Structured Products -- Registered Rep.
By BRIAN WARGO, Registered Rep. Magazine
(Originally published March 1, 2008)
Long a Favorite of Investors in Europe, structured products are rapidly gaining popularity in the United States. Last year, $114 billion in structured products were issued in the U.S., according to the Structured Products Association.
That's a 78 percent jump over 2006 — and dwarfs the $32 billion in structured products issued in 2004. Previously the sole purview of sophisticated high-net-worth investors in the U.S., they have begun filtering into the mainstream. The retail market bought some $58 billion — or about half — of the structured products issued in 2007.
Structured products combine financial instruments, typically bonds and derivatives, into a package that allows investors to bet on the direction of stocks, bonds and other investments. They are used to both hedge and to speculate, and typically pay an interest or coupon rate substantially above the prevailing market rate. Many of them also cap or limit upside returns, particularly if principal protection is offered.
One reason demand has picked up so much over the last three years is that a number of new financial institutions have entered the market, says Kumar Doraiswami, managing director and head of sales for Natixis Capital Markets. There are 30 active issuers today, up from 10 five years ago.
That has improved liquidity and helped to cut transaction costs — two issues that have long concerned investors and advisors, he says. The increased number of offerings, and the accompanying press coverage, has also helped generate greater awareness of the benefits and risks of the (relatively new) instruments, says Philippe El-Asmar, managing director and head of investor solutions for the Americas region for Barclays Capital.
El-Asmar believes structured products will continue to win greater appeal, particularly those that give investors exposure to attractive but risky markets, such as emerging equities or commodities, but protect them on the downside. Those frustrated with a 3.5-percent return on bonds, for example, may appreciate a product that protects their principal while giving them 80 percent of the upside in the market, he says.
Current market conditions could also enhance their appeal. Randy Pegg, executive vice president of Colorado-based Fixed Income Securities (FIS), says the U.S. structured-product industry witnessed tremendous growth during the market correction of 2000 to 2001 as more investors realized they could protect their downside, yet remain invested for some upside.
The same reasoning may now be at play, according to Pegg. “We have experienced increased demand with the recent market sell-off,” he says. “Investors have learned that to make money in the market, you must be in for the up days. When they know they have principal protection, investors can stay invested longer and still sleep at night — especially during turbulent times.”
For the full article, please click here.
(Originally published March 1, 2008)
Long a Favorite of Investors in Europe, structured products are rapidly gaining popularity in the United States. Last year, $114 billion in structured products were issued in the U.S., according to the Structured Products Association.
That's a 78 percent jump over 2006 — and dwarfs the $32 billion in structured products issued in 2004. Previously the sole purview of sophisticated high-net-worth investors in the U.S., they have begun filtering into the mainstream. The retail market bought some $58 billion — or about half — of the structured products issued in 2007.
Structured products combine financial instruments, typically bonds and derivatives, into a package that allows investors to bet on the direction of stocks, bonds and other investments. They are used to both hedge and to speculate, and typically pay an interest or coupon rate substantially above the prevailing market rate. Many of them also cap or limit upside returns, particularly if principal protection is offered.
One reason demand has picked up so much over the last three years is that a number of new financial institutions have entered the market, says Kumar Doraiswami, managing director and head of sales for Natixis Capital Markets. There are 30 active issuers today, up from 10 five years ago.
That has improved liquidity and helped to cut transaction costs — two issues that have long concerned investors and advisors, he says. The increased number of offerings, and the accompanying press coverage, has also helped generate greater awareness of the benefits and risks of the (relatively new) instruments, says Philippe El-Asmar, managing director and head of investor solutions for the Americas region for Barclays Capital.
El-Asmar believes structured products will continue to win greater appeal, particularly those that give investors exposure to attractive but risky markets, such as emerging equities or commodities, but protect them on the downside. Those frustrated with a 3.5-percent return on bonds, for example, may appreciate a product that protects their principal while giving them 80 percent of the upside in the market, he says.
Current market conditions could also enhance their appeal. Randy Pegg, executive vice president of Colorado-based Fixed Income Securities (FIS), says the U.S. structured-product industry witnessed tremendous growth during the market correction of 2000 to 2001 as more investors realized they could protect their downside, yet remain invested for some upside.
The same reasoning may now be at play, according to Pegg. “We have experienced increased demand with the recent market sell-off,” he says. “Investors have learned that to make money in the market, you must be in for the up days. When they know they have principal protection, investors can stay invested longer and still sleep at night — especially during turbulent times.”
For the full article, please click here.
Tuesday, June 10, 2008
State Street Survey: 60% of Pros Know ETNs
Advisors name ETFs as most innovative investment vehicle of the last two decades -- Products have become an increasingly vital investment vehicle
Tuesday, June 10, 2008
By James Langton, Investment Executive Magazine
Exchange-traded funds (ETFs) are changing the financial advisory business, according to new research from State Street Global Advisors and Knowledge@Wharton, the online business journal of The Wharton School at the University of Pennsylvania. The survey of 840 investment professionals found that 67% identified ETFs as the most innovative investment vehicle of the last two decades, and 60% reported that ETFs have fundamentally changed the way they construct investment portfolios.
Also, 76% of advisors believe the use of ETFs encourages fee-based models; 76% identified themselves as light-to-moderate users of ETFs, indicating that less than 50% of their portfolios utilize ETFs, just 4% report they do not use the instruments at all; 60% of respondents said they knew what exchange traded notes are, and 29% indicated that they plan on increasing their use of ETFs in the future; only 31% of advisors are currently using inverse ETFs, which allow investors to bet against a market index. However, nearly 40% report that they plan to increase their use of inverse ETFs in the future.
Advisors identified the top five most appealing characteristics of ETFs, as: low cost, liquidity, intra-day trading capability, tax efficiency, and investment style purity. The greatest disadvantages of ETFs were identified as: “unknown/untested indexes and/or portfolio methodologies” or the, “overwhelming number of choices.”
“Exchange traded products have become an increasingly vital investment vehicle for financial intermediaries,” says Anthony Rochte, senior managing director of State Street Global Advisors.
“By incorporating exchange-traded products into sector rotation, core-satellite, tax management, and portfolio completion strategies, advisors are simultaneously managing costs and risk, which helps underscore their value proposition and strengthen relationships with clients.”
“The pace at which new ETFs and indices are entering the market is clearly a concern,” said Rochte. “In light of these findings and the increasing importance of understanding index methodologies, the role of responsible product development and educational support cannot be overstated.”
Tuesday, June 10, 2008
By James Langton, Investment Executive Magazine
Exchange-traded funds (ETFs) are changing the financial advisory business, according to new research from State Street Global Advisors and Knowledge@Wharton, the online business journal of The Wharton School at the University of Pennsylvania. The survey of 840 investment professionals found that 67% identified ETFs as the most innovative investment vehicle of the last two decades, and 60% reported that ETFs have fundamentally changed the way they construct investment portfolios.
Also, 76% of advisors believe the use of ETFs encourages fee-based models; 76% identified themselves as light-to-moderate users of ETFs, indicating that less than 50% of their portfolios utilize ETFs, just 4% report they do not use the instruments at all; 60% of respondents said they knew what exchange traded notes are, and 29% indicated that they plan on increasing their use of ETFs in the future; only 31% of advisors are currently using inverse ETFs, which allow investors to bet against a market index. However, nearly 40% report that they plan to increase their use of inverse ETFs in the future.
Advisors identified the top five most appealing characteristics of ETFs, as: low cost, liquidity, intra-day trading capability, tax efficiency, and investment style purity. The greatest disadvantages of ETFs were identified as: “unknown/untested indexes and/or portfolio methodologies” or the, “overwhelming number of choices.”
“Exchange traded products have become an increasingly vital investment vehicle for financial intermediaries,” says Anthony Rochte, senior managing director of State Street Global Advisors.
“By incorporating exchange-traded products into sector rotation, core-satellite, tax management, and portfolio completion strategies, advisors are simultaneously managing costs and risk, which helps underscore their value proposition and strengthen relationships with clients.”
“The pace at which new ETFs and indices are entering the market is clearly a concern,” said Rochte. “In light of these findings and the increasing importance of understanding index methodologies, the role of responsible product development and educational support cannot be overstated.”
Robert Spicer: Market-Linked CDs
"Only thing we have to fear is fear itself". Franklin D. Roosevelt, March 4th, 1933
FDR gave this famous quote during his inaugural speech. Many people today erroneously believe he was talking about the threat of WWII. Not true. He was talking about the economy of the United States of America and the financial crisis it was facing at the time. Banks were particularly hard hit. Confidence was so shaken that a rumor could create a run on a banks assets and it could be closed overnight. However, by innovative and somewhat dramatic actions he regained the confidence of the American people in the U.S. banking system. One such step was the Nationwide Bank Holiday, closing every bank in America for an entire week. Every U.S. bank, while closed, was inspected by government examiners who would only open the bank if it was given a sound fiscal bill of health by the US Government.
This type of American ingenuity and will power changed the fabric of our financial system and allowed the United States to become the financial powerhouse it has become. Yet, today, our current stock market volatility and credit crunch has again created overblown fear. A fear that may be self defeating in the long run.
The world’s largest banks have devised a way for most investors to participate in the appreciation of the equity markets while protecting the principal invested with FDIC insurance.
Even the most conservative of investors now have the ability to participate in most, if not all, of the upside potential of a variety of markets (such as the S&P 500, DJIA or a basket of stocks or commodities) without the risk of losing any principal provided the investment is held to maturity. Typical maturities range from one year to seven years. Participation rates on the upside vary with each issue and can reach 100%.
These investments are called structured Certificates of Deposit or Market Linked CD’s. They are issued by some of the largest banks in the world and linked to indices or investments. The investor’s principal is protected (insured) up to $100,000 per depositor or up to $250,000 for certain qualified retirement plans such as an IRA account, per depositor per insured bank. FDIC insurance is backed by the full faith and credit of the United States Government. For more information on FDIC Insurance go to www.FDIC.gov. Unlike ordinary CD’s, these do not pay current income and the investor has to hold the investment to maturity for the strategy to be successful. If the investor liquidates before the stated maturity they may receive back less than their original principal.
Most individual investment portfolios are limited to a combination of cash, bonds, equities, real estate and perhaps some managed futures. In today’s markets too many investors are reducing their equity exposure due to a fear of losing principal. Fear drives overweighed allocations to cash and bonds. While past performance is not indicative of future performance, it is a well known axiom that equities have outperformed cash and bonds in the past, especially over the last 60 years. In my opinion, most investors today, after a careful review of their portfolio and risk tolerance, need equity exposure to achieve their long-term investment goals. Market Linked CD’s offer conservative investors a new vehicle to participate in the markets while reducing principal risk.
In the past only institutions and very high net worth individuals have been able to access these complex, performance-linked investments in a variety of asset classes that offer in tandem 100% principal protection on the downside combined with the upside potential of the linked asset class. According to the trade group Structured Product Association new issuance of all structured products in the U.S. has risen from $28 billion in 2003 to $114 billion in 2007.
FDR proclaimed in his first fireside chat “Let us unite in banishing fear” March 12th, 1933. We are fortunate to have new financial tools to help accomplish financial security in today’s market environment.
It is important you talk to your financial advisor before you invest. Some topics to discuss are your tolerance for risk, time horizon, your market outlook, and interest in particular asset classes, expenses, taxes, computation variations and participation rate, maximum and minimum interest rates, prepayment penalties, current income requirements and secondary market activity if any.
Open architecture is also a concern. When an investor is only offered the in-house brand he or she may be at a disadvantage. It is generally better when banks compete. Typically, independent broker dealers can secure CD’s, bias free, from many different issuing banks.
This is not intended to be an offer or solicitation for the purchase or sale of any investment.
Robert Spicer is an Executive Vice President at First Financial Equity Corporation in Greenwood Village, CO. He can be reached at 303-643-5959 or rspicer@ffec.com. Member FINRA/SIPC
FDR gave this famous quote during his inaugural speech. Many people today erroneously believe he was talking about the threat of WWII. Not true. He was talking about the economy of the United States of America and the financial crisis it was facing at the time. Banks were particularly hard hit. Confidence was so shaken that a rumor could create a run on a banks assets and it could be closed overnight. However, by innovative and somewhat dramatic actions he regained the confidence of the American people in the U.S. banking system. One such step was the Nationwide Bank Holiday, closing every bank in America for an entire week. Every U.S. bank, while closed, was inspected by government examiners who would only open the bank if it was given a sound fiscal bill of health by the US Government.
This type of American ingenuity and will power changed the fabric of our financial system and allowed the United States to become the financial powerhouse it has become. Yet, today, our current stock market volatility and credit crunch has again created overblown fear. A fear that may be self defeating in the long run.
The world’s largest banks have devised a way for most investors to participate in the appreciation of the equity markets while protecting the principal invested with FDIC insurance.
Even the most conservative of investors now have the ability to participate in most, if not all, of the upside potential of a variety of markets (such as the S&P 500, DJIA or a basket of stocks or commodities) without the risk of losing any principal provided the investment is held to maturity. Typical maturities range from one year to seven years. Participation rates on the upside vary with each issue and can reach 100%.
These investments are called structured Certificates of Deposit or Market Linked CD’s. They are issued by some of the largest banks in the world and linked to indices or investments. The investor’s principal is protected (insured) up to $100,000 per depositor or up to $250,000 for certain qualified retirement plans such as an IRA account, per depositor per insured bank. FDIC insurance is backed by the full faith and credit of the United States Government. For more information on FDIC Insurance go to www.FDIC.gov. Unlike ordinary CD’s, these do not pay current income and the investor has to hold the investment to maturity for the strategy to be successful. If the investor liquidates before the stated maturity they may receive back less than their original principal.
Most individual investment portfolios are limited to a combination of cash, bonds, equities, real estate and perhaps some managed futures. In today’s markets too many investors are reducing their equity exposure due to a fear of losing principal. Fear drives overweighed allocations to cash and bonds. While past performance is not indicative of future performance, it is a well known axiom that equities have outperformed cash and bonds in the past, especially over the last 60 years. In my opinion, most investors today, after a careful review of their portfolio and risk tolerance, need equity exposure to achieve their long-term investment goals. Market Linked CD’s offer conservative investors a new vehicle to participate in the markets while reducing principal risk.
In the past only institutions and very high net worth individuals have been able to access these complex, performance-linked investments in a variety of asset classes that offer in tandem 100% principal protection on the downside combined with the upside potential of the linked asset class. According to the trade group Structured Product Association new issuance of all structured products in the U.S. has risen from $28 billion in 2003 to $114 billion in 2007.
FDR proclaimed in his first fireside chat “Let us unite in banishing fear” March 12th, 1933. We are fortunate to have new financial tools to help accomplish financial security in today’s market environment.
It is important you talk to your financial advisor before you invest. Some topics to discuss are your tolerance for risk, time horizon, your market outlook, and interest in particular asset classes, expenses, taxes, computation variations and participation rate, maximum and minimum interest rates, prepayment penalties, current income requirements and secondary market activity if any.
Open architecture is also a concern. When an investor is only offered the in-house brand he or she may be at a disadvantage. It is generally better when banks compete. Typically, independent broker dealers can secure CD’s, bias free, from many different issuing banks.
This is not intended to be an offer or solicitation for the purchase or sale of any investment.
Robert Spicer is an Executive Vice President at First Financial Equity Corporation in Greenwood Village, CO. He can be reached at 303-643-5959 or rspicer@ffec.com. Member FINRA/SIPC
Tuesday, June 3, 2008
Open-Architecture in Slo-Mo: Investment News
Structured market leery of open systems
Yet brokerage firms' proprietary-only policy sparks risk concerns amid credit crisis
By Dan Jamieson June 2, 2008
Open architecture has been slow to come to the structured products market.
Structured products are unsecured debt obligations of the issuing brokerage firms, and despite growing concerns about Wall Street's financial strength, only one wirehouse sells outside products.
UBS Financial Services Inc. of New York has given its brokers a choice of issuers since 2006, said UBS spokeswoman Karina Byrne.
In addition to its own products, UBS offers products from Lehman Brothers Holdings Inc. of New York, Deutsche Bank AG of Frankfurt, Germany, HSBC Holdings PLC of London, and Barclays Capital, the New York-based investment-banking division of London-based Barclays Bank PLC.
Other than UBS, there's been no movement to open the doors.
Flows into structured products have almost doubled from $64 billion in 2006 to $114 billion in assets in 2007. Five years ago, in 2003, it was $28 billion.
The risk from a proprietary-only policy is that clients may not get the diversification they need, and they may pay too much when issuers don't have to compete.
Other than UBS, the only other traditional firms offering outside products are the private banking units at JPMorgan Chase & Co. of New York and Credit Suisse Group of Zurich, Switzerland, Mr. Styrcula said.
"If they did [use outside issuers], I would probably consider [structured products] a lot more seriously," said a Smith Barney rep who asked not to be identified.
For the full article, click here.
Yet brokerage firms' proprietary-only policy sparks risk concerns amid credit crisis
By Dan Jamieson June 2, 2008
Open architecture has been slow to come to the structured products market.
Structured products are unsecured debt obligations of the issuing brokerage firms, and despite growing concerns about Wall Street's financial strength, only one wirehouse sells outside products.
UBS Financial Services Inc. of New York has given its brokers a choice of issuers since 2006, said UBS spokeswoman Karina Byrne.
In addition to its own products, UBS offers products from Lehman Brothers Holdings Inc. of New York, Deutsche Bank AG of Frankfurt, Germany, HSBC Holdings PLC of London, and Barclays Capital, the New York-based investment-banking division of London-based Barclays Bank PLC.
Other than UBS, there's been no movement to open the doors.
Flows into structured products have almost doubled from $64 billion in 2006 to $114 billion in assets in 2007. Five years ago, in 2003, it was $28 billion.
The risk from a proprietary-only policy is that clients may not get the diversification they need, and they may pay too much when issuers don't have to compete.
Other than UBS, the only other traditional firms offering outside products are the private banking units at JPMorgan Chase & Co. of New York and Credit Suisse Group of Zurich, Switzerland, Mr. Styrcula said.
"If they did [use outside issuers], I would probably consider [structured products] a lot more seriously," said a Smith Barney rep who asked not to be identified.
For the full article, click here.
NASDAQ to Host SPA Press Event on June 11
On June 11, 2008, the NASDAQ and the Structured Products Association (SPA) will co-host a media briefing to discuss why "structured products" represent the fastest growing investment vehicle for American investors.
With nearly 7,000 structured products sold in the United States in the last year, this investment class has been resilient in turbulent markets and nimble in monetizing current market opportunities.
The Structured Product investment class outsold closed-end funds and convertible securities last year and was third behind hedge funds and exchange traded funds in new assets. Structured Products are rapidly becoming a mainstream investment instrument for millions of American investors, taking its place along side mutual funds, exchange traded funds, closed-end funds and stocks and bonds in well-diversified portfolios. This presentation is intended to provide the press with an overview of the structured products investment class and this rapidly developing industry.
WHO:
John Radtke, Executive Director, Incapital LLC
Karen Fang, Managing Director, Goldman Sachs
Matt Ginsburg, Executive Vice President, Wells Fargo
Nikki Tippins, Managing Director, J.P. Morgan
Philippe El-Asmar, Managing Director, Barclays Capital
With nearly 7,000 structured products sold in the United States in the last year, this investment class has been resilient in turbulent markets and nimble in monetizing current market opportunities.
The Structured Product investment class outsold closed-end funds and convertible securities last year and was third behind hedge funds and exchange traded funds in new assets. Structured Products are rapidly becoming a mainstream investment instrument for millions of American investors, taking its place along side mutual funds, exchange traded funds, closed-end funds and stocks and bonds in well-diversified portfolios. This presentation is intended to provide the press with an overview of the structured products investment class and this rapidly developing industry.
WHO:
John Radtke, Executive Director, Incapital LLC
Karen Fang, Managing Director, Goldman Sachs
Matt Ginsburg, Executive Vice President, Wells Fargo
Nikki Tippins, Managing Director, J.P. Morgan
Philippe El-Asmar, Managing Director, Barclays Capital
IHT: U.S. to toughen regulation of commodities markets
by Diana B. Henriques
International Herald Tribune
Regulators of the nation's commodity markets will demand more information about investors to determine whether they are evading market limits on speculation and artificially driving up world food prices.
The regulatory agency, the Commodity Futures Trading Commission, also plans to initiate talks with bank regulators to ensure that adequate credit is available for the farm economy.
Finally, in an unusual departure from the secrecy that usually cloaks its enforcement actions, the commission will confirm that it is investigating the price spike that hit the cotton futures market in late February, a step demanded by cotton industry executives at a commission hearing on April 22.
The commodity futures markets play a key role in establishing worldwide prices for wheat, corn, soybeans and other foodstuffs, as well as energy products like crude oil and natural gas.
But in recent years, these markets have also become an attractive haven for investors seeking both profits from rising prices and protection against inflation and a withering dollar. As a result, billions of dollars have poured into the commodity futures market — from pension funds, endowments and a host of other institutional investors — through the new conduit of commodity index funds.
Billions more have come in from investment banks that are hedging the risk of complex bets, called swaps, that these same investors have made in the unregulated international swaps market, which dwarfs the regulated markets supervised by the CFTC
The commission has come under fire, most recently at a hearing on May 20 before the Senate Committee on Homeland Security and Governmental Affairs, for not doing enough to monitor the impact of these investors on markets that have such influence on family budgets nationwide.
Specifically, the commission will start requiring more information about index funds and, more significantly, about the clients on the other side of the unregulated swaps deals that are being hedged on the regulated futures exchanges.
The swaps market has traditionally be seen as off limits for U.S. commodity regulators, but the commission clearly is responding to congressional concern that investors may be using swaps dealers to evade rules that limit the size of their speculative role in regulated markets.
The commission is also putting the brakes on granting waivers that have exempted some commodity index funds from speculative limits, and is formally dropping proposed rule changes that would have extended a blanket exemption to all index funds.
In recent years, more than a dozen commodity index fund companies have been granted individual waivers, after successfully arguing that they were using the futures markets exclusively to hedge their obligations to the people who have invested in their index funds. But the commission now intends to "be cautious and guarded before granting additional exemptions in the area," according to the draft proposal.
The full article can be accessed by clicking here.
International Herald Tribune
Regulators of the nation's commodity markets will demand more information about investors to determine whether they are evading market limits on speculation and artificially driving up world food prices.
The regulatory agency, the Commodity Futures Trading Commission, also plans to initiate talks with bank regulators to ensure that adequate credit is available for the farm economy.
Finally, in an unusual departure from the secrecy that usually cloaks its enforcement actions, the commission will confirm that it is investigating the price spike that hit the cotton futures market in late February, a step demanded by cotton industry executives at a commission hearing on April 22.
The commodity futures markets play a key role in establishing worldwide prices for wheat, corn, soybeans and other foodstuffs, as well as energy products like crude oil and natural gas.
But in recent years, these markets have also become an attractive haven for investors seeking both profits from rising prices and protection against inflation and a withering dollar. As a result, billions of dollars have poured into the commodity futures market — from pension funds, endowments and a host of other institutional investors — through the new conduit of commodity index funds.
Billions more have come in from investment banks that are hedging the risk of complex bets, called swaps, that these same investors have made in the unregulated international swaps market, which dwarfs the regulated markets supervised by the CFTC
The commission has come under fire, most recently at a hearing on May 20 before the Senate Committee on Homeland Security and Governmental Affairs, for not doing enough to monitor the impact of these investors on markets that have such influence on family budgets nationwide.
Specifically, the commission will start requiring more information about index funds and, more significantly, about the clients on the other side of the unregulated swaps deals that are being hedged on the regulated futures exchanges.
The swaps market has traditionally be seen as off limits for U.S. commodity regulators, but the commission clearly is responding to congressional concern that investors may be using swaps dealers to evade rules that limit the size of their speculative role in regulated markets.
The commission is also putting the brakes on granting waivers that have exempted some commodity index funds from speculative limits, and is formally dropping proposed rule changes that would have extended a blanket exemption to all index funds.
In recent years, more than a dozen commodity index fund companies have been granted individual waivers, after successfully arguing that they were using the futures markets exclusively to hedge their obligations to the people who have invested in their index funds. But the commission now intends to "be cautious and guarded before granting additional exemptions in the area," according to the draft proposal.
The full article can be accessed by clicking here.
Subscribe to:
Posts (Atom)
