Investing as an overseas expat opens up countless considerations about how you select products, structures and funds with an optimal balance between risk exposure and returns. One of the options to consider for your portfolio may be a structured product, depending on your investment objectives and broader financial position.
These investment products are commonly offered by financial institutions and banks and provide the flexibility to customise and adapt the product features to align with your requirements based on your expectations and investment time horizon.
In this guide, Chase Buchanan Wealth Management explains what structured products are, how they work, and the pros and cons to be aware of if you are revising your investment portfolio or considering the most suitable products to introduce diversification.
What Are Structured Products in Investment?
Structured products differ considerably from conventional investments because the product itself comprises multiple components and features, pre-packaged at the outset and tailored to the individual investor.
Also referred to as structured investment products or SIPs, this type of investment presents an opportunity to define your accepted risk exposure and upside potential, where your financial adviser puts together a bespoke package.
This works by incorporating a security asset, which could be a company share, a currency pair, an index fund, or a bond, and adjusting the pay-out features, which normally would mean the investment either pays regular coupons or dividends or provides wealth accumulation through capital growth.
Instead, a structured product generates returns linked to the performance of the underlying security or the performance of a group of assets packaged together. The investment can also include other features, including downside risk protection, capital protection, forward contracts and futures.
Much depends on your requirements, but a structured product might be designed with a fixed maturity period, a predefined pay-off, or other characteristics, as an alternative investment product that can provide access to several or specific asset classes with your required level of risk protection built in.
The Suitability of Structured Products for Expat Investors
The inherent personalisation and flexibility of a structured product makes them a viable option in many scenarios, not least when markets are volatile and where investors are looking for reliability and better control over their risk exposure.
Although structured products tend to include fixed-income derivatives with a good level of certainty around returns, each aspect can be tailored, from the investment capital you inject, the date the product matures, the underlying assets selected, and the returns available.
Structured products are often perceived as investments that are only available to institutional investors but have become increasingly popular for global investors who wish to prioritise customisation, want to integrate asset classes into their portfolios which are otherwise difficult to engage with, or want an investment that is finely tuned to their requirements.
Expats should be familiar with the deposit protection schemes in place in their country of residence or the location of an underlying asset within a structured deposit.
While most countries offer consumer safeguards to prevent losses if an issuing bank or institution fails, some products which appear to provide capital protection are excluded from government compensation schemes.
Pros and Cons of Structured Products
As with every investment, there are risks to be conscious of when evaluating the suitability of a structured product, with some of the downsides including:
- The need to make a medium to long-term investment, with some structured products providing a minimal or no pay-out before the maturity date.
- The prospect of returns being variable or lower than anticipated, depending on whether your package includes downside protection – and to what extent.
- The exposure to capital losses, although again this may vary with the capital loss protection merged into the structured product.
- The lack of accessibility where funds are locked into a structured product. In some cases, a call option can be built in where the investor can withdraw if a specified event occurs, such as a market value hitting a prescribed threshold.
Structured products are generally treated as longer-term investments because the highly tailored product structure affects liquidity. Investors may not be able to enter or exit positions quickly or efficiently.
However, with a full understanding of the risks, a structured product can be beneficial and offer access to high-return derivatives.
Experienced investors or those working with a professional portfolio manager can also opt for technical structured products, which can be traded with the potential to remove illiquidity.
Other factors to be mindful of include market risks, where the underlying assets do not perform as expected, and inflation risks. While structured products can be designed with capital protection, the possibility of real-time inflation eroding the cash value of invested capital remains.
The right investment will rely on your overarching strategy, the capital you wish to invest, the risk you are prepared to accept, and the returns that will make any investment product worthwhile. However, a structured product can be a favourable option where capital protection is a key requirement.
Tax Considerations for Structured Product Investments
Tax exposure is always an important factor for expats selecting an investment product, comparing options, or evaluating market risks and opportunities, and structured products are no different.
There may be complexities related to tax treatments, particularly where structured products are held within an insurance or tax wrapper and depending on your country of residence and citizenship status.
For example, US expats will be liable to declare and pay the arising tax obligation against a structured product regardless of their overseas tax residency – but this may not be the case for foreign nationals from other countries.
It is also essential to consult with a regulated, experienced financial adviser since any investment incorporating derivatives or volatile asset classes should be carefully managed. The package structure will influence your risk, likely returns and product protections.
Please contact your nearest Chase Buchanan Private Wealth Management office if you would like further information about structured products or wish to discuss this tailored investment product to evaluate whether it could add value to your investment portfolio.
*Information correct as at May 2023