Question: How do traditional funds compare with structured products?
Gary Dale - Investec
Traditional funds should never be compared to structured products for the simple reason that you cannot compare the risk/reward profiles of both investment strategies in the same way. Traditional funds risk mandates are much more diverse than structured products and vary depending on many factors including the investment objectives, the investment mandate given to the fund manager, the fund sector it sits in, asset mix and so on. Structured products have a much more defined risk profile, i.e a capital protected structured deposit or a structured note that offers capital protection provided the underlying index doesn't fall by more than 50% and not recover.
In other words, notwithstanding counterparty risk, the risk to capital on a structured product is known from the outset. The pay-off profiles on traditional funds are also impossible to compare with structured products, the former is unknown and based on a huge variety of factors including the funds benchmark and fund manager skill, whilst the latter is pre-defined and usually based upon the performance of an underlying index or combination of indices.
Having said all that, structured products can be used in an efficient way to complement a portfolio of traditional investment funds both from from a risk perspective and also by tailoring a clients investment objectives with the pre-defined return profiles available from many structured products. Diversification is paramount however the real skill for the adviser is doing it in an efficient way.
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