RIA Wright Opts for Short-Dated Protection (structuredretailproducts.com)

by Lori Pizzani
structuredretailproducts.com

A US wealth manager has said it is buying shorter dated equity-linked notes with capital protection for its clients as volatile conditions persist.

Frederick S Wright IV, chief investment officer of Smith & Howard Wealth Management told SRP he favors structured notes with performance linked to the S&P 500 (as a way of hedging against large cap stocks) and the Russell 2000 (to hedge against small cap stocks).

“We use them as equity replacements,” he said. He also likes those linked to the MSCI EAFE as stand-ins for international equities. Wright said his firm has used structured notes since late 2006/early 2007.

What he finds most appealing are notes with short maturities of two years or less.

The firm’s primary use for structured products is to reduce downside risk. “Most important to us is principal protection or partial protection, more so than a leveraged upside,” he said. “We look at it as a risk reduction tool versus enhanced return notes.”

While Wright says he has reviewed some structured notes linked to oil and global infrastructure indices, “there is nothing well priced [at present].” What he would like to see is a principal protected oil note that can provide positive returns whether oil prices rise or fall within a 30% to 35% range.

Smith & Howard usually works on a discretionary basis with clients, investing without specific security approval, but due to the relative novelty of structured products on the US market, Wright believes in discussing them with clients prior to purchasing.

Structured notes that provide returns even in down markets do not always get a strong reception, he said: “You’d think they would be attractive now. But clients’ credit concerns have eclipsed the potential benefits.

“I actually find it more difficult now because they are being issued by the banks with credit crisis [involvement],” he said. One question he repeatedly hears is: where do structured products fall in terms of the order of debt obligations of the issuer? “It’s a concern I’m hearing from clients and I don’t see this addressed in the product literature,” he said.

For a trial subscription to StructuredRetailProducts.com, click here.