Dayna Kleinman, Baird’s Senior Product Manager for Alternative Investments, recently discussed structured CDs, with Bloomberg Briefs.
It is important that investors are fully aware of the associated risks with structured products and whether these securities fit within clients’ investment parameters. Investment objectives should carefully be considered prior to investing in structured products. Depending upon the type of structured product issued, typical risk considerations include:
- Credit Risk: If a structured issue provides principal protection or a minimum return, any such guarantee rests on the credit quality of the issuer.
- Liquidity Risk: While a secondary market for structured products may exist, none is required. These investments should be considered buy-and-hold.
- Income Risk: If an underlying security of a structured note does not meet certain levels as determined at issuance, the return could be lower than the return on traditional fixed rate securities of comparable maturity and credit quality, and could be zero.
The article’s reference to a client’s ability to access the equity markets without principal risk is was made because Baird only sells principal protected structured investments. These may be more appropriate for conservative investors seeking market exposure with principal preservation. These typically offer full principal protection at maturity with the potential for additional return based on the performance of an underlying asset or group of assets. Investors may forfeit some upside exposure to an underlying asset in exchange for principal protection. Return of principal may not be obtained if the investment is sold prior to maturity. The investor may receive a lower return than a direct investment in the underlying security. Principal protection and payment at maturity is subject to the credit risk of the issuer.
With respect to the reference to the Morgan Stanley issue mentioned in the article, Baird did not solicit this to clients and it should be noted that an investor would not receive any contingent annual coupon with respect to any observation date if the average basket component performance of the basket components on such observation date is less than or equal to zero. A contingent annual coupon will be paid with respect to an observation date only if the average stock performance of the basket components, determined as set forth herein, is greater than zero. If the average basket component performance of the basket components, determined as set forth herein, is equal to or below zero on each observation date over the term of the CDs, an investor will not receive any contingent annual coupons.