What is a Structured Product?
Structured products are pre-packaged investments that – in general – include assets linked to interest rates plus one or more derivatives. They are generally tied to an index or basket of securities and are designed to facilitate highly customized risk-return objectives. This is accomplished by taking traditional security such as a conventional investment-grade bond and replacing the usual payment features – periodic coupons and final principal – with non-traditional payoffs derived from the performance of one or more underlying asset rather than the issuer’s own cash flow.
In addition, it offers investors a wide range of protection and return. These products are often marketed as an efficient way to invest in difficult-to-access markets. Their structure allows the investors to invest in various assets, while minimizing the risks. A typical structured product can have a maturity period ranging from one year to three years.
A structured product can be tailored to meet both income and growth objectives. The value at maturity is based on the market value of the underlying asset at the valuation date, which is different from the trade date. Depending on the structure of the product, the investor can choose to receive less than 100% of the market value, resulting in a lower-than-normal return.
Returns
Although structured products are considered niche products, they have proven to be a good alternative to direct investments. A structured product’s payoff formula can be very complex, but the risk profile of the investment is often not that high.
Issuers of structured products (large banks in general) normally pay returns on structured products once it reaches maturity.
Payoffs or returns from these performance outcomes are contingent in the sense that, if the return of the underlying asset is “x,” then the structured product pays out “y.” This means that structured products are closely related to traditional models of options pricing, although they may also contain other derivative categories such as swaps, forwards, and futures, as well as embedded features that include leveraged upside participation or downside buffers.
Customized Product
Although structured products are considered niche products, they have proven to be a good alternative to direct investments. A structured product’s payoff formula can be very complex, but the risk profile of the investment is often not that high.
Issuers of structured products (large banks in general) normally pay returns on structured products once it reaches maturity.
Payoffs or returns from these performance outcomes are contingent in the sense that, if the return of the underlying asset is “x,” then the structured product pays out “y.” This means that structured products are closely related to traditional models of options pricing, although they may also contain other derivative categories such as swaps, forwards, and futures, as well as embedded features that include leveraged upside participation or downside buffers.
Active Managed Certificate – (AMC)
Origin and what is it?
There are several ways for an asset manager to manage a client’s bankable wealth. Typically, a client assigns power of attorney to the asset manager, who manages the deposits at the client’s favoured bank. This approach enables that client to see all positions and movements in the portfolio. However, for the asset manager, handling individual client accounts is not scalable and might become cumbersome and inefficient with an increasing number of clients.
Moreover, certain securities have a high minimum investment amount and consequently are not available to every client with a diversified portfolio. These are the reasons, among others, why many asset managers choose to launch their own investment vehicles, through which they can distribute their investment strategy to more than one investor. However, the well-known and widespread fund structures are in many cases neither accessible nor suitable due to various limitations, such as high set-up costs, poor flexibility, and regulatory restrictions. An alternative that overcomes these limitations, and which has become popular in Europe in the last decade, is called “actively managed certificate” (AMC). AMCs are structured products offering participation in an underlying portfolio of assets.
Unlike traditional passive Structured Notes, AMCs are characterized by a discretionary, and therefore active, management of the underlying assets. The composition of the underlying assets changes over time based on decisions made over the life of the certificate by the strategy manager.
The Added Value of an AMC
AMCs combine the flexibility of structured products (favourable tax structure, low entry level, speed of issuance, efficient cost structure) with those of classic investment funds (portfolio diversification and adaptability to different market conditions). It allows the strategy manager to have access to the online trading world and/or to the dealing desk of the Issuer bank of the product and trade all asset classes (bonds, equity, structured products, FX, derivatives, funds) without limits to portfolio rebalancing or the number of transactions granted.
Alma Europe: Strategy Manager of Active Managed Certificate
Actively managed certificates offer intermediaries great flexibility for tailoring investment strategies, cost efficiency, and application possibilities.
Alma Europe, as an AMC strategy manager is implementing its different investment strategies via issuance of AMCs, each one with a defined strategy such: Fixed Income Investment grade Strategy, US equity Strategy, Emerging Market Fixed Income Strategy etc. Each Certificate is issued with a specific ISIN number and can be offered or purchased by its clients. The issuers of these certificates are large banks with high credit ratings and specialized in such vehicle issuance.
Alma Europe provides the issuer – based on a pre-defined strategy – with the initial portfolio composition and any future adjustments. We benefit from a high degree of flexibility in designing the investment strategy. Tailored-made certificates might include bonds, stocks, and other instruments.
General Rules
AMCs are subject to the general rules for structured products which are usually only distributed to Professional investors.
The description of AMCs in a simplified memorandum/prospectus must include information on the basic parameters of the strategy.
- Criteria for the selection of strategy-components
- Information on the handling of the income of such underlying values
- Strategy guidelines
- The leverage applicable to the strategy
- The Strategy Manager in charge of the strategy and its compensation
- Notes describing the accessibility of the information related to the composition and strategy.
Furthermore, AMCs need to be clearly distinguished from collective investment schemes and include a general disclaimer which must be highlighted in the simplified prospectus. The main reason for this differentiation is due to AMCs being subject to the issuer risk.
Alma Europe is legally obliged to ensure full transparency in the manner and amount of its remuneration.
