Structured products provide an investment lifeline in a volatile world
Investment markets locally and globally have entered a new era marked by heightened volatility and uncertainty. Investors are turning to alternatives, including structured products, to help diversify their portfolios.
What are structured products?
Structured products are fixed-term investments, with set maturity dates, that offer investors predetermined payoffs, provided a set of specified conditions are met. The payoff conditions clearly list the market performance scenarios under which the structured product will make money, as well as the scenarios under which it will lose money. Structured products are well suited to volatile market conditions as they offer a blend of risk protection against markets falling, with attractive returns when markets perform.
While the potential for enhanced returns at reduced risk is something of a holy grail in investing, it is important to first understand how structured products meet the dual requirements of stability and return in uncertain times.
Why now?
With current ongoing market volatility, geopolitical tension, trade disputes and persistent inflation, investors are faced with great uncertainty in terms of where to invest their money.
The S & P 500 lost almost 20% in 2022, but we have seen a decent recovery in 2023, and after a strong rally earlier this year the JSE All Share Index has had all its gains wiped out and is trading around 2% lower than at the start of 2023. Local and global bond markets have also recovered somewhat from 2022 but have not provided the returns initially expected for 2023.
Regardless of the payoff profile, structured products are designed to complement diversified investment portfolios as they often offer investors exposure to different asset classes, geographies, and currencies. Diversification is particularly important in volatile market conditions to reduce overall risk and to not rely on one type of asset to provide returns.
Examples of structured products
Discovery Invest offers a range of structured products for different risk appetites, preferred currencies and desired levels of market exposure.
Our well-known and extremely popular Discovery Capital 200+ structured product pays investors 100% gross return on investment after five years if the underlying global share portfolio is flat or positive. Investors will also have peace of mind from the downside protection offered, where they will receive their initial capital back if the underlying global share portfolio provides a negative return, however, the downside protection falls away if the global share portfolio falls by more than 30% during the five-year period. All returns and downside protection mentioned are before the effect of fees and taxes.
This structured note gives investors exposure to the performance of equity markets in Europe and the United States as the underlying global share portfolio comprises 20 quality European and US companies.
We currently have 11 open tranches of this structured note as well as six tranches that have already matured. Of the 11 open tranches, nine are currently in line to give investors 100% return.
In terms of those already matured, investors in five out of the six tranches received 100% return on their investment over the five-year period, before fees and taxes, outperforming over 99% of all listed funds in South Africa. The March 2015 tranche, which matured in the height of the COVID-19 crisis (March 2020), provided investors with much-needed downside protection.
This is a great result, when compared to the underlying share portfolio's performance, where, for example, the September 2017 tranche's underlying share portfolio returned only 4.8% over the five-year period. The most recently matured tranche, which was the September 2018 tranche, gave investors 100% return before the effect of fees and taxes on 28 September 2023, versus the 30% return on the underlying share portfolio over the five years.
We have also recently launched a new and enhanced version of this popular structured note, the Discovery Capital 200|300+.
The Discovery Capital 200|300+ products pay 100% gross return on investment after five years if the underlying global share portfolio return is flat or positive over the five-year period. Now, in addition to this, if the global share portfolio grows by 40% or more over the same period, investors will get an extra 100% growth! Investors also get the downside protection for falls in the global share portfolio of up to 30%.
We currently have two open tranches of the Discovery Capital 200|300+, the April and July 2023 tranches, and they are both currently in line to give investors 100% return before the effect of fees and taxes. Our most recent tranche, the November 2023 trance is still open for investment until 20 November 2023, or until capacity runs out.
When back-testing the November 2023 tranche of the Discovery Capital 200|300+, over more than 2,500 five-year periods from 1 January 2009 to 13 September 2019, this tranche would have provided investors with 100% return in nearly 40% of cases, and the extra 100% return in 48% of cases.
We have launched other structured products over the years, such as the Discovery Dollar Capital +, the Discovery Dollar Capital 50|50 as well as the Discovery Enhanced Yield Fund. Many of these tranches provided investors with significant returns or are still in line to.
Get guidance on the pros and cons
It's always a good idea to chat to a financial adviser to understand the tradeoffs that structured products impose compared with more traditional investments. It is also important to appreciate the detail of the terms and conditions of these exciting products.
Growth, conditional downside protection or any other resulting return is before the effect of advice fees, Discovery admin fees and taxes where applicable. These fees and taxes will affect the final return. The downside protection falls away if the global portfolio falls by more than 30% from its initial level at any point during the five year investment period. Please note that the boost will not apply to the Discovery Capital 200|300+ Fund if your client's investment was previously in funds that did not qualify. The full boost pays out over 10 years, with a portion payable after five years. Please see the Endowment Plan fact file for the full terms and conditions of the boost. The Discovery Capital 200|300+ is not a unit trust. Therefore, this fund is not regulated by the Collective Investment Schemes Control Act 45 of 2002. This document is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser. Discovery Life Investment Services Pty (Ltd), registration number 2007/005969/07, branded as Discovery Invest, is an authorised financial services provider. All life insurance products are underwritten by Discovery Life Ltd, registration number: 1966/003901/06, a licensed life insurer and an authorised financial services provider and registered credit provider, NCR registration number NCRCP3555. All boosts are offered through the insurer, Discovery Life Limited. The insurer reserves the right to review and change the qualifying requirements for boosts at any time. Product rules and terms and conditions apply. The growth over five years, before the effect of fees and taxes, represents the return of the Discovery Capital 200|300+ as a fund within the Endowment Plan and is; therefore, before the effect of any Discovery administration fees and initial and ongoing financial adviser fees, if they apply. Information contained in this document is indicative. The final terms depend on the market conditions on the date of trade and will be defined in the term sheet. Investors are also subject to any default risk or restructure of the issuer BNP Paribas Arbitrage Issuance BV and the guarantor BNP Paribas SA.
This is not a unit trust therefore this fund is not regulated by the Collective Investment Schemes Control Act.
Discovery Life Investment Services Pty (Ltd) branded as Discovery Invest is an authorised financial services provider. Registration number 2007/005969/07. All life assurance products are underwritten by Discovery Life Ltd. Registration number: 19 66/003901/06. A licensed Insurer and an authorised financial service provider and registered credit provider, NCR Reg No. NCRCP3555. All boosts are offered through the insurer, Discovery Life Limited, Product rules, terms and conditions apply. Product rules, terms and conditions apply.
Neither the Issuer nor the Guarantor have prepared the document and therefore accept no responsibility for its contents nor any losses in connection with the information contained herein.
Discovery Capital 200|300+ :
Growth, conditional downside protection or any other resulting return is before the effect of advice fees, Discovery admin fees and taxes, where applicable. These fees and taxes will affect the final return.
The downside protection falls away if the global portfolio falls by more than 30% from its initial level at any point during the five year investment period.
Please note that the boost will not apply to the Discovery Capital 200|300+ Fund if your client's investment was previously in funds that did not qualify. The full boost pays out over 10 years, with a portion payable after five years. Please see the Endowment Plan fact file for the full terms and conditions of the boost.
The growth over five years, before the effect of fees and taxes, represents the return of the Discovery Capital 200|300+ as a fund within the Endowment Plan and is, therefore, before the effect of any Discovery admin fees, and initial and ongoing financial adviser fees, if they apply. The figures are approximate. The final terms depend on the market conditions on the date of trade. Investors are also subject to any default risk or restructure of the issuer, BNP Paribas Arbitrage Issuance B.V., and the guarantor, BNP Paribas SA.
Related articles
How to keep track of your savings goal on the Discovery Bank app
How far are you from achieving your Vitality Money savings goal? No need to guess. Keep reading and watch a video to find out how you can easily keep track of your savings points on the Discovery Bank app.
Get the lowdown on Dynamic Interest Rates. Here's how it works
Did you know that understanding your interest rates can put money in your pocket? In fact, you have a lot more control over how much money you can save than you think. Especially when you can take advantage of Discovery Bank's Dynamic Interest Rates.
Everyone has a spending and saving style. Do you know yours?
Did you know? You can shop at our extensive network of online and in-store Discovery Miles partners using your Discovery Bank app. Shopping for essentials and spoils has never been easier or more convenient.