SPA-2008

Structured Products News from SPA

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.

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.