Structured Product News & Articles
Stay in-touch with the latest developments in the Structured Product market with news and articles coverage featuring industy events and stories.
Barclays Wealth | 01/28/2010 | By
More than two-thirds of advisers believe structured products are more attractive investments than 12 months ago, according to recent research from Barclays Wealth.
In a survey of more than 300 independent financial advisers polled during October 2009, 69% said they believed structured products had become more attractive over the past year. Just 7% said they believed the products held less appeal, while 20% said they were as attractive as they were 12 months before.
The survey – which was conducted online via Barclays Wealth’s intermediary website [www.barclayswealthprotectedinvestments.com] – was designed to canvass current adviser opinion on structured products.
Lisa Chaudhuri, manager, Barclays Wealth, said: “It is encouraging to see that advisers increasingly appreciate the merits of structured products despite a difficult year for the investment industry. The challenge has always been to secure for structured products a more prominent place in personal portfolios, and the research - and continued strong demand - suggests that this is increasingly happening as advisers’ perception changes.”
Read More >>>
The survey – which was conducted online via Barclays Wealth’s intermediary website [www.barclayswealthprotectedinvestments.com] – was designed to canvass current adviser opinion on structured products.
Lisa Chaudhuri, manager, Barclays Wealth, said: “It is encouraging to see that advisers increasingly appreciate the merits of structured products despite a difficult year for the investment industry. The challenge has always been to secure for structured products a more prominent place in personal portfolios, and the research - and continued strong demand - suggests that this is increasingly happening as advisers’ perception changes.”
Wealth Bulletin | 10/26/2009 | By Radi Khasawn
The structured products business ground to a halt with Lehman Brothers’ bankruptcy last year, but it is showing signs of life again thanks to new interest in foreign exchange strategies, according to dealers.
Royal Bank of Scotland has been marketing trades against the US dollar since February, and Standard Chartered has been offering a range of principal protected products this year that bet on interest rate rises in G10 and emerging market countries over the next three years.
Investors are particularly interested in carry trade strategies. The US dollar’s continued decline has led some analysts to conclude that the US currency has become the funding leg of trades, where investors borrow in dollars to buy higher yielding currencies. In the past that role was dominated by the Japanese yen, a country where interest rates have remained near zero for almost a decade.
Kara Lemont-Sportelli, head of interest rate and foreign exchange structuring at BNP Paribas in London said: “People are dipping their toes in the water and have been doing more and more of these trades. Historically, that trend will accelerate until the trade begins to unwind. There has been a higher volume of structured products since the beginning of September and that is largely down to carry.”
Tamas Korchmaros, foreign exchange structurer at Royal Bank of Scotland in London, said: “On the investor side, what we call currency pyramid trades are among the most popular. These are based on the argument that the dollar’s status as premier global reserve currency is under threat.
“Research we’ve carried out shows strong parallels between the predicament of sterling at the end of the 19th century, shortly before it fell from favour as the global reserve currency, and that of the dollar now.”
RBS internal analysis from September shows that US gross domestic product based on purchasing power parity has been overtaken by the combined Bric (Brazil, Russia, India and China) countries.
However, some think the outlook could change dramatically if the US raises rates. That scenario is widely expected to unfold in the medium term.
Lemont-Sportelli said: “Timing of rate hikes is uncertain, but the belief is that the rise will be rapid when it does start.”
Read More >>>
Investors are particularly interested in carry trade strategies. The US dollar’s continued decline has led some analysts to conclude that the US currency has become the funding leg of trades, where investors borrow in dollars to buy higher yielding currencies. In the past that role was dominated by the Japanese yen, a country where interest rates have remained near zero for almost a decade.
Kara Lemont-Sportelli, head of interest rate and foreign exchange structuring at BNP Paribas in London said: “People are dipping their toes in the water and have been doing more and more of these trades. Historically, that trend will accelerate until the trade begins to unwind. There has been a higher volume of structured products since the beginning of September and that is largely down to carry.”
Tamas Korchmaros, foreign exchange structurer at Royal Bank of Scotland in London, said: “On the investor side, what we call currency pyramid trades are among the most popular. These are based on the argument that the dollar’s status as premier global reserve currency is under threat.
“Research we’ve carried out shows strong parallels between the predicament of sterling at the end of the 19th century, shortly before it fell from favour as the global reserve currency, and that of the dollar now.”
RBS internal analysis from September shows that US gross domestic product based on purchasing power parity has been overtaken by the combined Bric (Brazil, Russia, India and China) countries.
However, some think the outlook could change dramatically if the US raises rates. That scenario is widely expected to unfold in the medium term.
Lemont-Sportelli said: “Timing of rate hikes is uncertain, but the belief is that the rise will be rapid when it does start.”
Fair Investment | 08/25/2009 | By Rebecca Sargent
Just over 90 per cent of Independent Financial Advisers (IFAs) said that they use structured investment products to provide clients with capital protection, a survey by Structured Products magazine has revealed.
Nevertheless, caution prevails amongst IFAs following the collapse of Lehman Brothers, which highlighted the need to assess the underlying strength of structured products, including the counterparty.
The counterparty is the protection behind most structured investment products, and is provided by a financial institution – If that institution were to default on financial obligations, any promise of capital return may not be met, which is why counterparty strength is paramount.
One IFA said: "The current problem is knowing the strength of the guarantee provider."
The survey also revealed that there is a lack of counterparty understanding amongst some advisers.
However, if used properly structured products can provide valuable capital protection. One IFA added: "In balanced portfolios, structured products have a place, but they are not a one-way bet.
"Provided clients are made fully aware of both the upsides and the downsides, there should be no problems."
In summary, structured products are not without risk, but as long as the product terms and associated risks are fully understood, many advisers are using them to form a critical part of a client's portfolio.
Read More >>>
The counterparty is the protection behind most structured investment products, and is provided by a financial institution – If that institution were to default on financial obligations, any promise of capital return may not be met, which is why counterparty strength is paramount.
One IFA said: "The current problem is knowing the strength of the guarantee provider."
The survey also revealed that there is a lack of counterparty understanding amongst some advisers.
However, if used properly structured products can provide valuable capital protection. One IFA added: "In balanced portfolios, structured products have a place, but they are not a one-way bet.
"Provided clients are made fully aware of both the upsides and the downsides, there should be no problems."
In summary, structured products are not without risk, but as long as the product terms and associated risks are fully understood, many advisers are using them to form a critical part of a client's portfolio.
CNBC.com | 08/24/2009 | By
Although the global financial crisis was triggered in large part by a meltdown in the structured products space, there is still a place for this instrument in investors' portfolios, said Norman Villamin, head of investment analysis and advice at Citi Global Wealth Management Asia Pacific.
"I think structured products certainly have a place in people's portfolio and I think they are an important way to manage risk for people," Villamin told CNBC.
A year-and-a-half ago, many people used structured products for speculation, but increasingly people are using it for risk management and for position management, he noted.
Many were badly hurt when credit markets froze as they did not fully understand the complexities of minibonds and credit derivatives, but with that experience in hand, Villamin said he is is positive it will give this investment vehicle a leg up.
"I think going forward ... a lot of people (will be) a bit more cautious, a bit more thoughtful about the size of the positions they are taking relative to their overall portfolio and really try to understand better how to use structured products,” he said. “And so to a certain extent, it was a learning experience, it was a good thing for the maturity of the business."
Read More >>>
A year-and-a-half ago, many people used structured products for speculation, but increasingly people are using it for risk management and for position management, he noted.
Many were badly hurt when credit markets froze as they did not fully understand the complexities of minibonds and credit derivatives, but with that experience in hand, Villamin said he is is positive it will give this investment vehicle a leg up.
"I think going forward ... a lot of people (will be) a bit more cautious, a bit more thoughtful about the size of the positions they are taking relative to their overall portfolio and really try to understand better how to use structured products,” he said. “And so to a certain extent, it was a learning experience, it was a good thing for the maturity of the business."
kci investing | 08/20/2009 | By Bob Carlson
Investors once again are flocking to investments that promise stock-like returns without the risk of stocks. This is not new. After the technology stock bubble broke in 2000-2002, investors poured money into equity-indexed annuities. Investors still want stock-like returns without the risk, but they don’t have confidence in the financial soundness of many insurers. So, investor dollars are flowing into bank-issued versions of the same investments. They have the advantages of equity-indexed annuities plus they are backed by FDIC insurance.
Equity-linked certificates of deposit have been around for a while, created by Chase Manhattan Bank two decades ago. Like equity-indexed annuities they promise returns linked to the stock market without the risk of loss. The CDs are not actually invested in stocks. Instead, the issuing bank promises the investor a return that is tied to the stock market in some way. If the stock market tanks, you still are guaranteed the return of your original investment. Some even guarantee a minimum rate of return. If stocks do well, you receive a return that could exceed the interest rates earned on traditional CDs.
Like their annuity counterparts, equity-linked CDs rarely promise the full return of a stock market index. Instead, returns are determined by a formula that in some way is based on changes in a stock index. This is where they can get complicated. The CDs might promise a percentage of the return or the return without dividends. A typical formula, for example, is to promise a percentage of the index’s change, such as 50%. Or the CD might use a complicated formula, such as the average of the daily closing values for the year. Id did a fair amount of writing about this for Retirement Watch a few years ago when equity-indexed annuities were hot and discovered there were about 29 return formulas in wide use. The formulas make it difficult not only to estimate what your return will be under different circumstances but also make it difficult to compare competing CDs.
Because they are complicated, equity-linked CDs tend to be sold to rather than sought out by investors. Many of the CDs are sold by brokers on commission, though they also can sold directly by the banks without commissions. When considering an equity-linked CD, you should compare offerings from different banks. It also is important to closely examine the formula used to compute the return, including any fees that will be subtracted from the return before it is credited to your account.
Here are a few other things you should know.
If issued by a bank covered by FDIC insurance, the principal value of the CD is guaranteed up to $250,000 if the bank fails ($500,000 in joint accounts). The rate of return, however, is not guaranteed. If the bank fails, you could lose the income.
Even if the bank does not fail, a return of your principal is only guaranteed if you hold the CD until maturity. Withdraw the investment before maturity and you might receive less than the initial investment. Read the early withdrawal penalties closely so you will know the risk. The CDs tend to have terms of three years or more.
Equity-indexed annuities fell out of favor because they are backed only by an insurance company's promise. As insurers suffered financial problems, investors worried whether they would see the return of their investments, much less any income from the annuities. The FDIC guarantee of CDs solves this concern. The CDs also tend to have lower fees than the annuities.
Your earnings on the CD are interest. They are not stock market returns. They are taxed as interest, not capital gains. The stock market returns are only a reference to determine the amount of interest credited to your account.
Banks tend to back up the CDs by investing the bulk of the money in bonds. This ensures there will be enough money to pay the principal at maturity. About 70% or more of the investment will be put in bonds. The rest of the money is put in stock index futures or some other derivative that will generate the stock market returns. You might be able to do the same with your money, save the fees and potential penalties, and earn the same or higher returns as the CD.
But today’s low interest rates make it difficult for banks to earn enough on the bonds to guarantee the principal and still have enough cash to invest in futures that will generate the promised stock returns. Some analysts are worried that, like the insurers, the banks are making promises they will have difficulty meeting in a few years.
Like the annuities, equity-linked CDs are for conservative investors who ordinarily have trouble taking the risk of the stock market but need or want higher returns than are currently available from bonds and regular CDs. Equity-indexed CDs are “structured products.” You are not investing in the stock market, and the returns depend on the skill and safety of the bank.
Read More >>>
Like their annuity counterparts, equity-linked CDs rarely promise the full return of a stock market index. Instead, returns are determined by a formula that in some way is based on changes in a stock index. This is where they can get complicated. The CDs might promise a percentage of the return or the return without dividends. A typical formula, for example, is to promise a percentage of the index’s change, such as 50%. Or the CD might use a complicated formula, such as the average of the daily closing values for the year. Id did a fair amount of writing about this for Retirement Watch a few years ago when equity-indexed annuities were hot and discovered there were about 29 return formulas in wide use. The formulas make it difficult not only to estimate what your return will be under different circumstances but also make it difficult to compare competing CDs.
Because they are complicated, equity-linked CDs tend to be sold to rather than sought out by investors. Many of the CDs are sold by brokers on commission, though they also can sold directly by the banks without commissions. When considering an equity-linked CD, you should compare offerings from different banks. It also is important to closely examine the formula used to compute the return, including any fees that will be subtracted from the return before it is credited to your account.
Here are a few other things you should know.
If issued by a bank covered by FDIC insurance, the principal value of the CD is guaranteed up to $250,000 if the bank fails ($500,000 in joint accounts). The rate of return, however, is not guaranteed. If the bank fails, you could lose the income.
Even if the bank does not fail, a return of your principal is only guaranteed if you hold the CD until maturity. Withdraw the investment before maturity and you might receive less than the initial investment. Read the early withdrawal penalties closely so you will know the risk. The CDs tend to have terms of three years or more.
Equity-indexed annuities fell out of favor because they are backed only by an insurance company's promise. As insurers suffered financial problems, investors worried whether they would see the return of their investments, much less any income from the annuities. The FDIC guarantee of CDs solves this concern. The CDs also tend to have lower fees than the annuities.
Your earnings on the CD are interest. They are not stock market returns. They are taxed as interest, not capital gains. The stock market returns are only a reference to determine the amount of interest credited to your account.
Banks tend to back up the CDs by investing the bulk of the money in bonds. This ensures there will be enough money to pay the principal at maturity. About 70% or more of the investment will be put in bonds. The rest of the money is put in stock index futures or some other derivative that will generate the stock market returns. You might be able to do the same with your money, save the fees and potential penalties, and earn the same or higher returns as the CD.
But today’s low interest rates make it difficult for banks to earn enough on the bonds to guarantee the principal and still have enough cash to invest in futures that will generate the promised stock returns. Some analysts are worried that, like the insurers, the banks are making promises they will have difficulty meeting in a few years.
Like the annuities, equity-linked CDs are for conservative investors who ordinarily have trouble taking the risk of the stock market but need or want higher returns than are currently available from bonds and regular CDs. Equity-indexed CDs are “structured products.” You are not investing in the stock market, and the returns depend on the skill and safety of the bank.
Risk.net | 08/17/2009 | By Pierre Cooper
Structured products have come top of the list of investment products financial advisers would recommend to their clients, according to a new survey by Morgan Stanley. Structured plans leapt two places from the bank's last survey in December 2008, overtaking both bonds and mutual funds.
The survey of 100 independent financial advisers (IFAs) revealed that structured products were favoured by 76% of respondents - a 21% jump from December 2008. There was also a 5% rise, from 40% to 45%, in the number of advisers who were willing to recommend plans and one third thought structured products were an important part of the portfolio, a 21% increase in the past six months.
Unsurprisingly, given the recent market turmoil, capital protected products were the most popular (86%), closely followed by kick out products (79%) and fixed-term products (71%). Products with only soft protection lagged far behind the safer options (56%).
The result chimed with a survey of 130 IFAs conducted by Structured Products in May, which found just over 90% used structured products as a way to give their clients capital protection. The fact that only 33% of advisers would recommend a product with no capital protection shows how cautious most advisers remain.
There was a significant drop in the number of advisers who would never recommend a structured product, from 11% to 5%. Among that 5%, the main reason why advisers would not recommend plans was credit risk (58%), followed by not liking products on offer (16%), no interest from clients (8%) and finally those who do not have enough understanding, but said that they would like more information (5%).
The survey showed IFAs were taking a closer look at the credit rating of counterparties - rating it just behind capital protection in terms of the most important feature that they look for when reviewing a plan for clients.
Read More >>>
Unsurprisingly, given the recent market turmoil, capital protected products were the most popular (86%), closely followed by kick out products (79%) and fixed-term products (71%). Products with only soft protection lagged far behind the safer options (56%).
The result chimed with a survey of 130 IFAs conducted by Structured Products in May, which found just over 90% used structured products as a way to give their clients capital protection. The fact that only 33% of advisers would recommend a product with no capital protection shows how cautious most advisers remain.
There was a significant drop in the number of advisers who would never recommend a structured product, from 11% to 5%. Among that 5%, the main reason why advisers would not recommend plans was credit risk (58%), followed by not liking products on offer (16%), no interest from clients (8%) and finally those who do not have enough understanding, but said that they would like more information (5%).
The survey showed IFAs were taking a closer look at the credit rating of counterparties - rating it just behind capital protection in terms of the most important feature that they look for when reviewing a plan for clients.
Barclays Capital | 07/22/2009 | By
Structured CDs are most popular as investors seek the benefits of capital protection
Barclays Capital hosted financial intermediaries, including wealth managers and broker/dealers, with approximately US$6 trillion assets under management, at its First Annual Broker/Dealer and Wealth Conference in New York City on July 16.
The conference provided an opportunity for financial intermediaries to learn about the benefits of Barclays Capital’s structured investments and flow product capabilities. Given the challenges facing market participants this year, the panels discussed structured investments, such as principal protected notes and CD-linked notes, across asset classes, including commodities, foreign exchange, equities and interest rates. The agenda also explored cash products across investment grade credit, high yield and distressed credit, convertible bonds, municipal bonds, emerging markets and agency debt.
“We are strong believers that education and knowledge are important to helping investors make informed decisions,” said Philippe El-Asmar, Managing Director and Head of Investor Solutions at Barclays Capital. “We established the inaugural Barclays Capital Broker/Dealer and Wealth Conference to provide financial intermediaries with the opportunity to hear from industry experts on how to respond to market challenges.”
Barclays Capital also announced the results of its first annual US Broker/Dealer and Wealth survey which looked at industry trends, challenges and issues facing this community. Highlights include:
Market Outlook
Survey participants expect the growth of revenue for structured investments to outpace the overall growth of other products over the next two years.
Investment Strategies
Confirming industry trends, ninety-four percent of respondents identified capital protection as the most important and common product strategy, followed by more transparent and simple products. Quantitative-based strategies were seen as the least important.
Asset Classes
More than half of respondents viewed municipal bonds as the most popular asset class for flow products, followed by equities.
The survey also showed that equities are viewed as the most popular asset class for structured investments among seventy percent of respondents, followed by interest rates and foreign exchange.
Structured CDs have increased tremendously in popularity as investors seek the benefits of capital protection and FDIC insurance while retaining exposure to upside performance of the reference asset.
Commenting on the results, El-Asmar said “It is encouraging to see that leading wealth managers and broker/dealers anticipate growth in the structured investments industry.”
About Barclays Capital
Barclays Capital is the investment banking division of Barclays Bank PLC. With a distinctive business model, Barclays Capital provides large corporate, government and institutional clients with a full spectrum of solutions to their strategic advisory, financing and risk management needs. Barclays Capital has offices around the world, employs 20,000 people and has the global reach, advisory services and distribution power to meet the needs of issuers and investors worldwide.
Read More >>>
The conference provided an opportunity for financial intermediaries to learn about the benefits of Barclays Capital’s structured investments and flow product capabilities. Given the challenges facing market participants this year, the panels discussed structured investments, such as principal protected notes and CD-linked notes, across asset classes, including commodities, foreign exchange, equities and interest rates. The agenda also explored cash products across investment grade credit, high yield and distressed credit, convertible bonds, municipal bonds, emerging markets and agency debt.
“We are strong believers that education and knowledge are important to helping investors make informed decisions,” said Philippe El-Asmar, Managing Director and Head of Investor Solutions at Barclays Capital. “We established the inaugural Barclays Capital Broker/Dealer and Wealth Conference to provide financial intermediaries with the opportunity to hear from industry experts on how to respond to market challenges.”
Barclays Capital also announced the results of its first annual US Broker/Dealer and Wealth survey which looked at industry trends, challenges and issues facing this community. Highlights include:
Market Outlook
Survey participants expect the growth of revenue for structured investments to outpace the overall growth of other products over the next two years.
Investment Strategies
Confirming industry trends, ninety-four percent of respondents identified capital protection as the most important and common product strategy, followed by more transparent and simple products. Quantitative-based strategies were seen as the least important.
Asset Classes
More than half of respondents viewed municipal bonds as the most popular asset class for flow products, followed by equities.
The survey also showed that equities are viewed as the most popular asset class for structured investments among seventy percent of respondents, followed by interest rates and foreign exchange.
Structured CDs have increased tremendously in popularity as investors seek the benefits of capital protection and FDIC insurance while retaining exposure to upside performance of the reference asset.
Commenting on the results, El-Asmar said “It is encouraging to see that leading wealth managers and broker/dealers anticipate growth in the structured investments industry.”
About Barclays Capital
Barclays Capital is the investment banking division of Barclays Bank PLC. With a distinctive business model, Barclays Capital provides large corporate, government and institutional clients with a full spectrum of solutions to their strategic advisory, financing and risk management needs. Barclays Capital has offices around the world, employs 20,000 people and has the global reach, advisory services and distribution power to meet the needs of issuers and investors worldwide.
Investment News | 06/07/2009 | By Jeff Benjamin
Certificates of deposit that link investment returns to stock market indexes are helping prop up the sagging structured-products industry.
These bank-issued products — sometimes called indexed CDs or market-linked CDs — are gaining appeal among conservative investors drawn to the security associated with a traditional CD and the potential upside of equity market or other benchmark performance.
Some market watchers warn, however, that “there is no free lunch” and that financial advisers and their clients need to understand the various distinctions between indexed CDs and traditional CDs.
“Right now, these are still products that are sold, and not necessarily bought, and the [product manufacturers] can be very creative and theoretically, at least, very reckless,” said Keith Styrcula, chairman of the Structured Products Association in New York.
First created more than two decades ago by what was then Chase Manhattan Bank of New York, indexed CDs are in some respects hybrids of bank CDs and structured products, offering specific upside exposure and downside protection.
ATTRACTIVE FEATURE
The fact that they are CDs, and not registered securities like most structured products, is one of the most attractive features of indexed CDs: The principal investment is guaranteed for up to $250,000 ($500,000 for joint accounts) by the Federal Deposit Insurance Corp.
The level of FDIC insurance for bank deposits, including CDs, was increased last year from $100,000, and that temporary in-crease was extended last week to be in place through the end of 2013.
From January through May, indexed-CD sales represented 15.4% of the $10.8 billion in structured-product sales.
This compares with 6.5% of $17.7 billion for the comparable period a year earlier and 8.3% of $14.2 billion during the first five months of 2007, according to Arete Consulting Ltd. of London.
In 2007, before the credit crisis exposed many of the risks associated with structured products, the industry saw record sales of $107 billion, up from $62 billion in 2006.
In 2008, total industry sales dropped to $70 billion, according to the Structured Products Association.
“This is good for helping to get risk-averse clients back into the market,” said Mike Abelson, senior vice president of investments and product management at Genworth Financial Wealth Management Inc. in Pleasant Hill, Calif.
Genworth, which operates a $15 billion platform that allows financial advisers to build customized portfolios for their clients, began working this month with The Goldman Sachs Group Inc. of New York and other banks to create indexed CDs that can be offered for sale on its platform.
While the FDIC insurance comes with the full faith and backing of the U.S. government, the various indexed CD structures are far from the straightforward products most investors might ordinarily associate with a certificate of deposit.
For instance, the principal is guaranteed only if the indexed CD is held to maturity, which typically ranges from three to five years. Also, while the principal is FDIC-insured, the accrued income is not protected, which means there is a risk associated with the creditworthiness of the issuing bank.
“Coming off of 2008, people are looking for principal protection and we're getting a lot of inquiries from clients, but this is definitely not your father's CD,” said Kevin Mahn, chief investment officer with Hennion & Walsh Asset Management Inc., a Parsippany, N.J.-based firm with $2 billion under advisement.
Like traditional CDs, the indexed variety does not include a fee charged to investors. However, some brokers do charge commissions when selling them.
Like other structured products, the indexed CDs offer a range of target-performance options, which includes performance pegged to anything from the Dow Jones Industrial Average to inflation: One introduced this month by Barclays Capital Inc., the New York-based investment banking division of Barclays PLC in London, links performance to the consumer price index.
Depending on what the CD's performance is linked to, the majority of an investment will typically be used by the issuing bank to purchase enough Treasury bonds to guarantee the principal. The remaining 30% or so will be invested in derivatives to generate synthetic exposure to the target benchmark.
The derivative exposure is where investors take on the risk, no matter how remote, that the issuing bank could go belly-up. It's not the risk of bank default, but the lower-interest-rate environment in general that concerns Scott Miller Jr., managing partner at Blue Bell (Pa.) Private Wealth Management LLC, which has $300 million under advisement.
“The low interest rates and high market volatility have made it hard for firms to create a good structure right now,” he said. Mr. Miller said he has seen indexed CDs that are not offering 100% of a benchmark's return and are providing performance exclusive of dividend yields, but at least one product provider insists it can meet investor demand for both performance and protection.
“We strive for 100% index participation,” said Mike Sherzan, president and chief executive of Bankers Financial Services Corp., a Johnston, Iowa-based firm that creates indexed CDs for regional and community banks in 13 states.
“The costs of the guarantees have become more expensive. Without question it is a problem right now,” Mr. Sherzan added.
Even with the recent stock market rally, some industry representatives believe the appeal of indexed CDs could continue to grow for investors looking for principal protection with some potential for upside.
“I think it offers peace of mind,” said Philippe El-Asmar, head of investor solutions at Barclays.
Read More >>>
Some market watchers warn, however, that “there is no free lunch” and that financial advisers and their clients need to understand the various distinctions between indexed CDs and traditional CDs.
“Right now, these are still products that are sold, and not necessarily bought, and the [product manufacturers] can be very creative and theoretically, at least, very reckless,” said Keith Styrcula, chairman of the Structured Products Association in New York.
First created more than two decades ago by what was then Chase Manhattan Bank of New York, indexed CDs are in some respects hybrids of bank CDs and structured products, offering specific upside exposure and downside protection.
ATTRACTIVE FEATURE
The fact that they are CDs, and not registered securities like most structured products, is one of the most attractive features of indexed CDs: The principal investment is guaranteed for up to $250,000 ($500,000 for joint accounts) by the Federal Deposit Insurance Corp.
The level of FDIC insurance for bank deposits, including CDs, was increased last year from $100,000, and that temporary in-crease was extended last week to be in place through the end of 2013.
From January through May, indexed-CD sales represented 15.4% of the $10.8 billion in structured-product sales.
This compares with 6.5% of $17.7 billion for the comparable period a year earlier and 8.3% of $14.2 billion during the first five months of 2007, according to Arete Consulting Ltd. of London.
In 2007, before the credit crisis exposed many of the risks associated with structured products, the industry saw record sales of $107 billion, up from $62 billion in 2006.
In 2008, total industry sales dropped to $70 billion, according to the Structured Products Association.
“This is good for helping to get risk-averse clients back into the market,” said Mike Abelson, senior vice president of investments and product management at Genworth Financial Wealth Management Inc. in Pleasant Hill, Calif.
Genworth, which operates a $15 billion platform that allows financial advisers to build customized portfolios for their clients, began working this month with The Goldman Sachs Group Inc. of New York and other banks to create indexed CDs that can be offered for sale on its platform.
While the FDIC insurance comes with the full faith and backing of the U.S. government, the various indexed CD structures are far from the straightforward products most investors might ordinarily associate with a certificate of deposit.
For instance, the principal is guaranteed only if the indexed CD is held to maturity, which typically ranges from three to five years. Also, while the principal is FDIC-insured, the accrued income is not protected, which means there is a risk associated with the creditworthiness of the issuing bank.
“Coming off of 2008, people are looking for principal protection and we're getting a lot of inquiries from clients, but this is definitely not your father's CD,” said Kevin Mahn, chief investment officer with Hennion & Walsh Asset Management Inc., a Parsippany, N.J.-based firm with $2 billion under advisement.
Like traditional CDs, the indexed variety does not include a fee charged to investors. However, some brokers do charge commissions when selling them.
Like other structured products, the indexed CDs offer a range of target-performance options, which includes performance pegged to anything from the Dow Jones Industrial Average to inflation: One introduced this month by Barclays Capital Inc., the New York-based investment banking division of Barclays PLC in London, links performance to the consumer price index.
Depending on what the CD's performance is linked to, the majority of an investment will typically be used by the issuing bank to purchase enough Treasury bonds to guarantee the principal. The remaining 30% or so will be invested in derivatives to generate synthetic exposure to the target benchmark.
The derivative exposure is where investors take on the risk, no matter how remote, that the issuing bank could go belly-up. It's not the risk of bank default, but the lower-interest-rate environment in general that concerns Scott Miller Jr., managing partner at Blue Bell (Pa.) Private Wealth Management LLC, which has $300 million under advisement.
“The low interest rates and high market volatility have made it hard for firms to create a good structure right now,” he said. Mr. Miller said he has seen indexed CDs that are not offering 100% of a benchmark's return and are providing performance exclusive of dividend yields, but at least one product provider insists it can meet investor demand for both performance and protection.
“We strive for 100% index participation,” said Mike Sherzan, president and chief executive of Bankers Financial Services Corp., a Johnston, Iowa-based firm that creates indexed CDs for regional and community banks in 13 states.
“The costs of the guarantees have become more expensive. Without question it is a problem right now,” Mr. Sherzan added.
Even with the recent stock market rally, some industry representatives believe the appeal of indexed CDs could continue to grow for investors looking for principal protection with some potential for upside.
“I think it offers peace of mind,” said Philippe El-Asmar, head of investor solutions at Barclays.