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Want protection and returns, and willing to take some risk? Structured products might just be the thing for you. By Celine Tan

espite the uncertainty in the market, you still need to invest and grow your money. In times like these, investments that safeguard your money yet offer gains linked to other asset classes may just be the thing for the conservative. One such investment is structured products, which have been gaining popularity since the country's exchange control regulations were liberalised in 2005/2006. This alternative investment tool aims to provide better returns than conventional fixed deposits (FDs) through enhanced exposure to different asset classes but carries higher risks (see box for more). And these products have evolved to become more sophisticated and offer a higher level of transparency. But, is this the right time to go into structured products and are they suitable for you?


structured products, the minimum investment amount was RM250,000 or lower for sophisticated investors with substantial high net worth (RM3 million). "Structured products are seen as more sophisticated investment vehicles where customers can choose the


Within the reach of more investors

Structured products were traditionally the province of the banks. Previously, based on the Securities Commission (SC)'s guidelines on the offering of

underlying instruments that they are comfortable with and knowledgeable about, like equities, currencies or interest rates," says Moey Tan, chief operating officer, personal financial services, of Hong Leong Bank Bhd. A commonly available structured product, says Tan, is the currencylinked structures, which are nonprincipal protected but promise a return. (With these products, you would be exposed to risks related to foreign-exchange transactions. At maturity, you have the option to accept an alternative currency for the deposit.) However, regulatory developments in recent years have resulted in new restrictions and greater flexibility. Last year, the revised SCs guidelines on the offering of structured products did not stipulate a minimum transaction amount. Under the Bank Negara Malaysia (BNM) Guidelines on Negotiable Instruments of Deposits (2006), banks are now allowed to offer investments linked to a floating rate negotiable instrument of deposit (FRNID) at a minimum investment size of RM100,000 (the minimum investment in Singapore is S$5,000). According to BNM references, FRNID is a bearer note that certifies that a sum in ringgit or foreign currency has been deposited with the issuer and requires it to pay interest to the bearer upon his presentation of the certificate through a licensed financial institution. One such product is AmBank (M) Bhd's recently launched AmStructured Deposit ­ Global Bourses, a three-

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year FRNID, which initially invests most of its deposits in fixed-income instruments to provide capital protection. The remainder will be invested in a derivative instrument, which is linked to the performance of a basket of eight global bourse stocks. The deposit pays a fixed return of 2% in the first year while the returns for the second and third years are based on the performance of its underlying. The minimum investment amount is RM100,000. Hong Leong Bank has also periodically offered FRNIDs, including the Hong Leong Triple Prosperity series and Hong Leong Double Happiness with equity underlying in global stocks like Nokia OYJ and Royal Dutch Shell PLC. The Hong Leong Double Happiness FRNID was designed to pay a 10% per annum coupon in the first quarter, and has an auto-call feature that allows the investment to terminate before the maturity of three years if the underlying stocks perform above 105% from the initial inception level on a quarterly observation.

And even more accessible

In recent months, fund management houses have joined hands with financial institutions to offer funds that give clients exposure to a range of structured offerings. The emergence of structured funds have allowed investors to participate at a much lower entry level -- a mere RM2,000. (In the early years of structured products, capital-guaranteed funds provided a similar proposition but did not use derivatives.) Raymond Tang, chief investment officer of CIMB-Principal Asset Management Bhd, says structured funds (or structured unit trusts) are targeted at retail investors who have no direct access to structured products, either because they do not qualify or because of the large minimum


investment size. The unit trusts, which invest in either a FRNID or a structured product, are issued under the SC's guidelines on unit trusts. Like most structured products, structured funds are closed-ended, where there is a limited offer period. In January, AmInvestment Services Bhd launched its AmGlobal Currencies ­ Capital Protected, investing in two years' zero negotiable instruments of deposits (ZNID), which seeks to protect investors' capital, and offers the option to participate in the appreciation of the Korean won, Brazil real, Russian ruble, Canadian dollar and euro against the US dollar. The minimum investment amount is RM5,000. Recently, HWANGDBS Investment Management Bhd launched the HWANGDBS Asia Aspire Capital Protected Fund that aims to provide capital protection for investments upon maturity, investing a minimum of 90% of its net asset value (NAV) in a ZNID while a minimum of 3.5% of the NAV is used to invest in an over-the-counter option linked to the performance of a basket of up to 10 securities of companies and the one-month Australian Treasury Bills. The minimum investment amount is RM2,000. There are also funds that aim to provide capital appreciation by investing in structured products, namely HWANGDBS Global Banks Structured Fund, a two-year capitalprotected closed-end unit trust that invests in a structured product issued by HSBC Bank, which is linked to the performance of three global bank stocks.

TAN: Investors can choose the underlying instruments

DINESH: Structured products should not be used as a speculative tool

More transparency and liquidity

One common risk associated with structured products is a relative lack of liquidity due to the highly customised nature of the investment. The full

extent of returns from the complex performance features is often not realised until maturity. Lately, issuers of structured products are increasingly making their investment performances known to both investors and the public. Banks like Malayan Banking Bhd are now providing weekly reports for its structured investments on their websites. For example, reports of the Maybank Structured Islamic Deposit and Maybank AsiaPac Hybrid Capital Protected are available. The AmStructured Deposit ­ Global Bourses' price is published on a daily basis. "You can redeem anytime during the three years based on the daily pricing, but of course, the capital is only protected if you redeem at the end of the maturity," says Yvonne Phe, chief investment officer

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STRUCTURED products 101

in general, a structured product

is a financial instrument whose pay-off is linked to the performance of an underlying instrument such as indices, equities, forex, interest rates and/or commodities. A large portion of the principal is invested in fixed income or money-market instruments to protect investor's capital while a small part is used to invest in derivatives. There are principal-at-risk products that pay a higher income generated at the cost of some risk to the investor's capital. The maturity, underlying asset, and payout formula are normally fixed prior to the issuance of the funds and are designed to remain unchanged throughout the life of the investment. In a sense, structured products are similar to traditional investments like unit trust funds and other bundled investment options, as they are essentially a mix of different products. "The key differentiation from traditional investments is the use of option strategies to achieve a desired outcome with relatively small investment outlays. This is possible because the price of the option is usually only a small percentage of the value of the underlying," says Lim Eng Seong, general manager, personal financial services, at HSBC Bank Malaysia. So, a relatively small movement of the underlying in the option holder's predicted direction would generate an attractive gain for him. Wong Loke Lim, director of Hickham Capital Management Sdn Bhd, says investment banks that have predominant stockbroking background and are comfortable with the equities markets, particularly CIMB Investment Bank Bhd and OSK Investment Bank Bhd, are aggressively promoting structured call warrants and have most of their structured products linked to both domestic- and foreignexchange-listed shares as well as commodities. For instance, in January, CIMB Investment Bank unveiled its first listed Bull Equity-linked Structure (Bull ELS), a short-term structured warrant that allows investors to purchase underlying shares at a discounted price. zero cost as fees may not be transparent. "There is no uniform standard for pricing, making it harder to compare the net-of-pricing attractiveness of alternative structured products offerings. Many structured-product issuers work the pricing into their option models so that there is no explicit fee or other expense to the investor. On the flip side, this means that the investor can't know for sure what the implicit costs are," adds Wong.

Returns and payouts

The returns of structured products, says Tan, are usually paid in coupons that range from 5% to 15% per annum, based on the historical return of the FRNID and other structured products offered by Hong Leong Bank, depending on the performance of the underlying instruments. Generally, principal-protected investments give a lower expected return compared to principal-atrisk investments. However, unless returns are guaranteed, the investor can walk away with no returns at all. HSBC Bank has so far launched 13 structured products since 2006 and, to date, none have yet to reach the maturity period. "Based on year-to-date valuations, some of the structured products in HSBC Bank have absolute returns of as high as 30%," says Lim. There are various types of payoffs, including payment only at maturity or periodic payoff, for example, annually or quarterly. The potential payout depends on the structured fund, as every fund offers different yields, depending on the underlying structure and fund design. The Prudential O8 Capital Protected Asian Infrastructure Fund, launched last October, is one of the first few that offer a potential payout every quarter. The fund provides eight opportunities for early termination if the closing level of the underlying investment is at or above its initial level at each quarter throughout the tenure of the fund.


Costs and fees vary from one structured fund to another. For instance, Prudential Fund Management Bhd's structured funds bear zero annual management fees but charge frontend loads of 2.5% to 3.75% of the fund's NAV. HWANGDBS Asia Aspire Capital Protected Fund does not charge a management fee but imposes a sales charge of 5% of its NAV. It is important to look at fees when assessing a product. Many principal-protected structured products issued by banks come without sales or management fees. "This gives you a very good entry position as, technically, the investments could potentially make money almost immediately without a need to offset any initial fees," says Moey Tan, chief operating officer, personal financial services, at Hong Leong Bank Bhd. The lack of fees, however, doesn't signal

LIM: You can use

option strategies

WONG: No uniform

standard for pricing

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Common pay-out structure in a structured unit trust fund

Initial principal amount invested Best-of option Fixedincome instruments

Potential option payoff Initial principal amount invested

TOH: Structured products can be considered as inflexible

Over the investment horizon


of fixed income at AmInvestment Management Sdn Bhd. Similarly, HSBC Bank allows you to redeem your structured investments once a week on Mondays, with prior notification on the preceding Friday during banking hours. "This gives you the comfort of knowing that you can take profit or exit from a particular structure because your views have changed," says Lim Eng Seong, general manager, personal financial services, at HSBC Bank. There is no redemption charge for such flexibility but the investment would be redeemed based on the prevailing market price, hence the value of investment may be more or less than the principal amount. However, the payment transaction period is within five working days, unlike fixed deposits.

Are they for you?

With the volatile market, product providers argue that structured investments are timely for the conservative investor since the principal is latently protected while there is growth potential from its underlying. Although structured products would not earn you interest or pay you equity dividends, "they not only let you benefit from rising rates and prices; they even let you optimise

returns when the markets are moving sideways. And you can even make money in falling markets," says Lim. Nevertheless, structured products aren't risk-free, so it's important to take a longer-term view. Whether it comes from a bank or a structured fund, for the capital protection mechanism to apply, investors must wait till the fund reaches its maturity date. "The fund's maturity period ranges from one to three years. Any early redemption is mostly chargeable and is, therefore, not suitable for investors who are looking to use this allocated capital within the stipulated maturity period. Therefore, structured products can be considered as inflexible as some of the underlying portfolio may only be realised at maturity," says Mark Toh, CEO of Prudential Fund Management Bhd. "Fluctuations would exist but since investors should have a longer-term perspective, it does not matter for them as they are expected to stay invested during the whole term of the product. Structured products should not be used as a speculative tool," says Dinesh Virik, executive director of Perkasa Normandy Advisers Sdn Bhd. Even if there is an early termination feature, "structured funds usually restrict the frequency of redemptions or repurchase of units. In addition, the

TANG: Minimum redemption size usually higher than unit trusts

minimum redemption size is usually higher than traditional unit trusts," says Tang. He adds that depending on the payoff structure of the structured product, which the structured fund invests in, the intrinsic value of the structured product may not completely reflect the performance of the reference indices at that point in time. This is unlike a conventional open-ended unit trust where performance can be directly measured by comparing the NAV per unit at the beginning of the investment against the NAV per unit at the end of the investment period. "So, investors should not make a direct comparison between the investments in a traditional unit trust and that in a structured fund -- even though they invest in the same assets -- as the comparison may yield very different performance results over the same period," says Tang.


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