A structured note? That sounds exotic - where do I sign?

Barry has been playing the hokey cokey all night -  you put your left paw in you put your left paw out.  I just wish he would decide whether he is an outside farm cat or an indoor lounge lizard.  

Anyway I wanted to touch on an investment structure you might find yourself being offered by your financial adviser - 'The Structured Note'

Generally speaking it is a bond that will pay you a coupon if a certain equity index goes up. They can be priced against several at once - the rule of thumb is the more indices the higher the coupon. They will have a number of Bank names backing the issue.  I bought a USD  one last year which will pay me a  15% coupon if 3 indices (Eurostoxx, ASX, FTSE) achieve certain levels. 

They may also have a feature where they will automatically mature if the market goes too high - the house always wins.

For the IFA it is a fire and forget investment requiring no active management. If the indices don't perform it is not their fault. 

I have to say I think there are better options for investments. In fact the Maltese financial services recently changed the rules to stop IFA's lumping all their clients into these structures by allowing only a maximum of 30% of any pension portfolio to be invested in them.

The key problem for someone like me became instantly clear after I decided to bang 20% of my portfolio into one. My reasoning seemed to be valid. It was in USD  and a 15% coupon annually for 6 years seemed an OK risk return ratio.  Year 1 came to an end with the criteria for the coupon not being met so no coupon will be paid.  Another reason I bought it was that being a bit like Viktor Kayam I needed to own a product to also be able to sell it to others - I have not sold one to anyone else.

I am facing potentially 6 years of holding a bond that might or might not pay me. I prefer making my money dance like one of those old cowboy films where the guy shoots at the feet of the other guy.

For non professionals or even pros these notes can be a great addition to a diversified portfolio. For me I have realised that I can make the money work better and be more liquid by using an active macro approach to investing in funds with daily NAV.

As it stands the Note is now only 16% of my portfolio given the gains I have made in other funds. I am considering just taking the 10% haircut (will be 1.6% hit to the portfolio) to get the money working more actively.  I should also clarify that as a financial adviser we do state that investment horizons should be 5 years plus. The old day trader in me is shouting at me about having 'locked myself in' for potentially 6 years in an illiquid investment.

This was just a Saturday morning ramble but I will leave you with the thought that if I had bought an  S and P ETF rather than lock myself in I would have gained 9.75% with daily NAV.

I should remind myself that there are much better types of lock in involving beer.

Feel free to get in touch to talk about these or any other type of investments

Don