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Investment options for steady growth and volatility

Investment options for steady growth and volatility

21 September 2010 / by Paul Dicken

Whether investors believe the markets will start to settle in autumn or the volatility of recent months will continue, there are investment options in the structured product sector.

Executive director at Morgan Stanley, Marc Chamberlain, said structured investment products have been 'eternally popular' over the last 18 months due to their attractive risk and return rate.

"Providers were able to put products out that gave a consistently much higher level of income [than other investment options] while taking an educated level of equity risk," Chamberlain said.

Structured products are able to offer some level of capital protection and attractive return rates, compared to equity investments that often have a higher exposure to instability in the market.

"For a lot of these products volatility has been good," Chamberlain said, "people may start to look to see if there is going to be a break on the upside linked to growth."

If the market does settle then there could be a shift in focus, from products which take advantage of a volatile market to protected deposit type accounts linked to growth in the FTSE100.

Gary Dale, head of intermediary sales for derivatives and structured products at Investec, said that overall growth in the FTSE over the next few months would not necessarily mean lower FTSE100 volatility.

"If there is a 10 per cent gradual rise in the FTSE to say 6000 points, is that necessarily going to mean that the index will be more or less volatile? The truth is we don't know. Volatility is changing day by day and impacts on pricing new Structured Products but to imply that an increase in the FTSE100 may mean lower volatility would be incorrect."

Dale said volatility in the market had peaks and troughs but it was still relatively high compared to two or three years ago. "The higher the volatility the better it is for some Structured Investments, such as capital at risk products," Dale added.

Volatility in the market is one factor affecting pricing of products by providers, as well as interest rates which affect the cost of setting-up a product.

Dale doesn’t share the view that the FTSE100 will see steady growth. He said if investors think there will be a decline in volatility then it may help determine the type of structures they buy. One option is a fully protected deposit or note product with geared participation, such as 2x or 4x any growth in the FTSE100.

Structured investments normally consist of a bond with a financial counterparty (e.g. a bank) offering varying degrees of capital protection and an option linked to the markets to achieve returns.

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