Structured Products
Risk/Reward
Nearly all investors want high returns and low-risk. It is rare that investment markets offer such opportunities. However, we believe the emerging markets will continue to enjoy very dramatic growth for many years to come and by 'riding' these markets but supported with a 100% capital back guarantee we believe we can offer the holy grail of low-risk and potentially high returns
Outline of operation of the bond
The bond itself has quite a technical structure, but in order to simplify it, there is a fixed five-year term. With a five-year term, there is a 100% capital guarantee, i.e. if £10,000 is invested, then the minimum return of actual money in five years' time is £10,000.
The money invested by our clients is pooled and sufficient monies are placed on deposit with Newcastle Building Society so that over the five year period the money grows back to the gross investment amount. The residual monies are then available to take a 'financial bet' (an option) on the performance of either an individual index or a group of indices. In establishing the options, the price is governed by not only the price of the options, but the volatility of any of the markets and the underlying rate of interest. The higher the rate of interest, the more money there is to invest in the option pool.
Emerging markets
There are really three issues why direct investment in emerging markets is high risk. Firstly, there is the volatility associated with the investment markets - things can move up sharply, but similarly they can fall sharply.
The second issue is also key. For many years, the emerging markets price increases have been substantial, with gains of 30% to 40% not being unknown. However, for a UK-based investor, currency volatility has then had a major impact. At times, clients have received a 40% increase in share value, but have then actually lost money on the conversion from the share currency back into Sterling.
The third reason is that regulation of these new markets is still developing, if not in its infancy. Therefore, there cannot yet be the same degree of confidence through direct investment compared with G7 economies.
MW strategy
The investment strategy that we are creating is a three-year plan incorporating twelve quarterly guaranteed products. Each plan is separate so our clients can choose whether or not to invest and the appropriate amount. Our proposal is to invest in the full series of twelve products, so that over the three-year period our clients will build up a well diversified portfolio, with maturities crystallising each quarter at the end of the first five years for three years thereafter.
We have not taken development of this investment product lightly. The emerging markets are rapidly becoming the dominant players on the world stage, and to ignore them would be to look backwards rather than to the future.