Expert view: A new option to reduce investor risk

One Keynesian saying is that markets can be irrational for longer than investors can stay solvent. With the world of investment prone to wild fluctuations and value rising and plummeting sharply, it is a situation that trustee investors just have to live with.

Or do they? Structured investments, a hitherto unknown and relatively specialist investment avenue, are opening up new options for trustee investors. Their unique characteristics mean they are rapidly becoming a key investment option in the financial arena.

The reason is simple. Structured investments can deliver linked investments that can pre-define risk and return over known time periods. They not only define risk, but they can also reduce it, or even remove it in some cases. They can also deliver improved performance participation for investors in the asset classes that they link to. Engineered by investment managers in collaboration with investment banks, these vehicles utilise financial instruments that work to mathematical formulas to deliver defined returns.

And because they are formula-driven, investors are not subject to the vagaries of fund managers' potential to over or underperform. Structured investments are proving their worth in well-trodden markets. However, this unique approach is also facilitating access to high-growth markets or notoriously high-risk asset classes.

With the potential for more than 100 per cent capital protection, the advent of structured investments mean that even charity clients that are looking for low-risk investments can now secure access to more interesting asset arenas such as emerging markets, commodities (energy and industrial metals, for example), 'soft' agricultural products (such as sugar and corn), hedge funds and private equity.

Not only do structured investments provide necessary variety, but they are also inexpensive because of the lack of management fees. Trustees should welcome these new diversifying and risk-management tools, particularly in relation to the much-prized capital protection tag. KEY POINTS

- Structured investments pre-define risk and returns over known time periods.

- They are engineered by investment managers in collaboration with investment banks.

- This type of formula-driven investment is not subject to fund managers' potential to over or underperform.

- Markas Gilmartin is an adviser director at AWD Chase de Vere 

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