|
|
|
|
 |
| |
A spate of structured products entering
the financial market is perhaps a direct
response to investors' cry for an instrument
that is quite safe but has the potential
of earning higher returns in a relatively
short time. Smart Investor talks to Singapore's
Top Wealth Managers about their views on
Structured Deposits.
If you have an appetite for relatively safe
investments with higher returns and are
prepared to wait longer for profits, you
might want to check out the different types
of structured deposits offered by banks
for their high net-worth clients. But be
prepared to plonk in a pile of cash before
you would be able to see meaningful returns
from this type of deposits.
Structured deposits are quite new in the
banking world derived mainly from high net-worth
customers' requests for higher yielding
instruments. This product which was once
offered only to select "premium"
customers made its way into the mass market
around year 2000 and has not looked back
since.
Generally, the products are manufactured
accordingly to the risk and returns appetite
of the investor. Structured deposits may
be offered on a close-ended basis, where
it is made available for a limited period
only or on an open-ended basis.
According to the Head of OCBC Wealth Management
Mr. Nicholas Tan, "lots of clients came
to us and said that they wanted to invest
in a short-term investment product with
a possibility of an upside." He also
pointed out that among the investors that
have taken the plunge in structured deposits
includes non-profit organizations and condominium
councils. "In most cases, they are
unable to make investment decisions beyond
the one or two year's mandate," said
Mr. Tan.
However, there are still bankers like Standard
Chartered Bank's general manager for Wealth
Management, Mr. Dennis Khoo who believes
that the affluent or rich people don't invest
in structured deposits because their risks
appetites are different. "The affluent
usually don't need their principal sum assured
or protected. They have a higher risk appetite
and would rather invest in the higher risk
and returns instruments like foreign exchange."
Mr. Khoo adds, "I figure that when we
manufacture a structured deposit instrument,
the masses tend to fit the target profile.
However, investors have to understand that
the invested amount or principal invested
have to be substantial enough to generate
or sustain the growth of the linked instrument."
The realm of structured-products is derived
from the private banking world. Structured
products can encompass many things including
bonds, notes, treasury product, interest
rate instruments, currency and other exotic
derivatives. Typically, in the past, structured
deposits were individually manufactured
for the private banking customer with the
help of the bank's product specialist.
Today, banks have brought that concept down
to the masses. At the mass level, there
are a number of products that provide customers
with high returns at a relatively lower
risk. The distinguishing feature of structured
deposit is the 100 per cent principal protected,
just like in its cousin the fixed deposit
accounts. All deposit products are required
by law to return at least the principal
amount back regardless of what happens.
The catch? Because of the need to guarantee
the principal, the investor might find very
little left to invest on the upside and
this gives them limited returns as well.
So to obtain any meaningful gains the depositor
must be ready to set aside a huge pile of
cash in the account.
What is a Structured Deposit?
A structured deposit is essentially a combination
of a deposit and an investment product,
where the return is dependent on the performance
of some underlying financial instrument.
In most cases, the typical financial instruments
linked to such deposits might include market
indices, equities, interest rates, fixed-income
instruments, foreign exchange or a combination
of these.
Banks prefer linking structured deposits
to the foreign exchange than any other instrument.
The mechanism usually involves dual/twin
currency deposits and exchange rate that
is pre-determined in advance. At maturity,
the banks can opt to pay the investor in
either the base currency or alternative
currency at the pre-determined price.
Another common structured-linked instrument
is interest rates. The returns are usually
calculated based on a formula related to
a specific floating interest rate. In some
cases, the structured deposit may also be
based on a "reversed" relationship
to the interest rate. That is, if the interest
rate goes down, the returns get better.
A rarely used linked instrument for structured
deposits might include the credit linked.
Unlike the rest, this instrument does not
depend on the performance but rather the
occurrence of a credit event that is whether
some company becomes insolvent, or defaults
on its loans. The returns are directly related
to the credit risk of the specified company,
and the investor has to assess the probability
of this happening.
Meanwhile, Standard Chartered bank's Mr.
Khoo said that the bank's structured deposits
are mostly linked to currencies. "Generally,
structured deposits are linked to the currency
exchange because of the wider fluctuations.
There are more opportunities for the bank
to make better margins for the clients after
paying out the guaranteed interest,"
he said.
Mr. Khoo also pointed out that there could
be lesser incentive for some banks here
to develop structured deposits that are
linked to interest rate instruments. This
is because of the ongoing phenomena of a
"flat yield curve environment,"
he explained.
A flat yield curve means that long-term
and short-term interest rates are relative
the same so it does not provide enough incentive
to launch a structured deposit under such
circumstances.
"The 15- year Singapore government
securities give a 3.5 per cent yield. Some
banks are offering 2.2 per cent for three
months fixed deposit. The difference is
about 1.3 per cent. If you divide 1.3 per
cent by 15 years, then result is only 0.0866
per cent," said Mr. Khoo.
Maybank echoed Mr. Khoo's views on the flat
yield curve at the present moment saying
that it too does not expect to see a substantial
variance in long and short-term interest
rates.
| Terms |
Underlying Instrument |
| FX |
Foreign Exchange or Currencies |
| SIBOR, LIBOR, or “reference Rate” |
Interest rates |
| Bonds, notes |
Interest rates |
| Gold, oil, “softs”, “metals” |
Commodity Prices |
| Index, equities, stocks |
Equities |
| Baskets |
Usually equities |
| Combo Baskets |
Combination of various risks |
FEATURES OF A GOOD STRUCTURED DEPOSITS
There are primarily six features:
| 1. |
First, assess the reputation of the bank. Look for banks that are safe and reliable.
|
| 2. |
The effective rate of return is another important item. A good structured deposit usually offers an effective rate. |
| 3. |
The type of returns should be considered carefully. Daily accruals give deposit holders more opportunities to earn bonus interest rates as compared to all other forms of payout. |
| 4. |
Payout frequency is another factor to think about. The more frequent the payout, the earlier the customer will enjoy the returns. Comparing two long dated structures with similar maturities, the structure with quarterly payouts will be better than the one with bonus only at the end. |
| 5. |
Best structures usually employ simple underlying investments. If the investor understands the structure, he will usually take on more risk. The golden rule is “the higher the risks, the higher returns.” |
| 6. |
The tenor of the deposit is also something to consider. The shorter the tenor, the greater the flexibility of the deposit. However, the returns on a shorter tenor structured deposit will likely be lower than the one with a longer tenor. |
STRUCTURING THE PRODUCTS
At first sight, the structured deposit should have higher minimum investment amount compared to fixed deposits, usually starting at amounts of $5,000, and going as high as $150,000. In contrast, fixed deposits require as little as $1,000 to start the account. The types of structured deposits offered by banks have varied too over the last few years. The life of the deposits usually range between 1 to 10 years compared to fixed deposits which has shorter life span of as short as three months.
Examples:
Standard Chartered Bank - Bonus Series 1
| What is it: |
First, assess the reputation of the bank. Look for banks that are safe and reliable. |
| Min deposit: |
The effective rate of return is another important item. A good structured deposit usually offers an effective rate. |
| Maximum launch: |
The type of returns should be considered carefully. Daily accruals give deposit holders more opportunities to earn bonus interest rates as compared to all other forms of payout. |
| Interest: |
Payout frequency is another factor to think about. The more frequent the payout, the earlier the customer will enjoy the returns. Comparing two long dated structures with similar maturities, the structure with quarterly payouts will be better than the one with bonus only at the end. |
| Linked Features: |
Best structures usually employ simple underlying investments. If the investor understands the structure, he will usually take on more risk. The golden rule is “the higher the risks, the higher returns.” |
Where does the Structured Deposit fit into an investor's portfolio?
There’s a sequence of financial health checks to complete before embarking on the route towards structured deposits. First, make sure that there’s sufficient insurance protection cover like life and disabilities. Second, retirement planning should already be secured. Only if there’s extra or discretionary money left then it should go into structured deposits, the experts said. The rationale is that returns from fixed deposits or savings deposit may be capped but with structured deposits, there’s an opportunity to make higher returns.
Call for better returns, but more carefully planned risks
In a period of flat yield curve, manufacturing structured deposits is difficult. The process of coming up with a winning formula also means that banks have to make sure that customers can be expected to receive a reasonable return for the amount of risk taken.
Careful consideration has to be given before formulating a structured product because it could lure investors to make a switch by taking out all their money from their other accounts and place them in structured deposit without fully considering the risks involved. Therefore, banks may only launch structured deposits occasionally and if there’s a demand. Otherwise, it may end up cannibalizing its own range of products.
As for the future of structured deposits, time deposits are still desired by the conservative Singaporean. The demand for structured deposits is still an individual’s preference depending on risk appetite, investment psyche, and needs. |
| |
 |
|
|
|
|
|
|
|
|
|
|
|
|
