August 11, 2022

Structured Notes and the benefits of Fixed Income Investments

Structured Notes and the benefits of Fixed Income Investments

Offering clients defined returns over a specified period of time

Melbourne Capital Group Structured Notes

What is a Structured Note?

A structured note is a fixed term investment product which has a return based on the performance of underlying assets, typically made up of a basket including stock index, equity, and/or commodity assets. Structured notes have different time periods, usually falling between 4 and 7 years, and provide returns to the investor if specific conditions are met as laid out in the product guidelines.

During the set time period, the performance of the underlying assets will be regularly reviewed, and if specific conditions are met then the investor will receive returns on their investment. This is usually reviewed on a quarterly, biannual, or annual basis.

What are the key benefits to investing in Structured Notes?

Security: Counterparty security is a massive consideration for clients, and it’s important that all of the banks and counterparties in the structured note are first class. Our team review products thoroughly to ensure that the notes in our investment universe are all issued by Tier 1 banks and only involve regulated and reputable firms.

Capital Protection: We identify structured notes which are designed with deep barriers, to potentially protect investment capital. These vary between different notes, and it’s important to discuss capital protection closely with your Private Wealth Manager before selecting a specific note. We analyse the broad range of structured products available and provide a curated investment universe.

Full Value: We do not charge an entry fee on structure note products to our client.

Income: Structured notes can give clients the ability to generate an income on their capital, even during a low interest market environment when other income generating investment strategies such as savings accounts and government bonds aren’t performing well. At this time, savings accounts arguably don’t offer returns which exceed inflation.

Memory Function: This is a feature which comes into consideration  during negative market volatility such as during 2020. If coupons haven’t been paid on previous dates due to the underlying assets not meeting the specified conditions in the structured notes, the next time they do meet the specified conditions, all previously missed coupons will be paid out in full.

Are there different types Of Structured Notes?

Yes, there are two primary types of structured notes which we offer to our clients. These are Quarterly Income Paying Notes and Auto-callable Notes, which are both very different in their features and potential benefits.

Quarterly Income Notes: As the name suggests the concept is very straightforward, the note pays a cash coupon on a quarterly basis providing that the specified criteria are met.

Autocallable Notes:
These structured notes pay a single coupon if the underlying asset price exceeds a predetermined “upside” barrier. This price level is usually set at 100% of the starting prices (i.e., $2.00 if the starting price was $1.00), at which point the note then “Matures”, returning the investors capital in full, plus the agreed coupon. Often these are are observed on an annual basis, and the product can roll over from one observation period to the next, providing compounding returns if the note doesn’t mature.

Is Capital at Risk?
All investments involve a certain level of associated risk, and it’s important that investors fully understand the risks before taking any action. Structured notes have features which may mitigate capital risk by providing protection barriers, and longer product terms which may provide more time for markets to recover in the case of unexpected downturns such as Covid-19 or the Global Financial Crisis.

We only offer notes which are linked to one or more tier 1 capital market indices (i.e., SP500, FTSE100, DOW30, DAX30), or major listed companies, always avoiding illiquid or problematic asset classes. Some of the structured notes we provide access to offer 100% capital protection to investors at maturity.

Can I invest in Structured Notes in different currencies?

Yes, we have structured notes available in different currencies such as United States Dollars, Great British Pounds, and the Euro.

Why do Melbourne Capital Group client’s choose to invest in Structured Notes?

Being able to achieve income returns in volatile downward or sideways moving markets is extremely appealing to many clients who are finding it difficult to generate income from traditional asset classes. Furthermore, the downside protection that is offered from structured notes also provides clients with a level of comfort that even if things are volatile in the short term, their money is working for them, generating income, and not being eroded by inflation.  

Structured notes are a complex investment and certainly not suitable for every investor. There is a broad range of structured note types, issuers, and quality. We believe it is necessary to have a close discussion with a Wealth Management Professional before investing. Reach out today and our Private Wealth Managers will be happy to go through the process fully.

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