Are there alternative opportunities in volatile markets?

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SAP Partner | <b>Grande Financial Services, Inc.</b>

Financial experts point out that what you don’t know you don’t know can hinder you.

If you are wondering what opportunities may be presenting themselves now for investors please read on.

As educators of innovative financial strategies for High-Net-Worth investors, we would be remiss in not introducing you to what we deem to be a sophisticated instrument for high-net-worth investors, such as ophthalmologists. Structured investments have evolved substantially during the last few decades, with an increase in flexible ways to tailor a portfolio to the unique situation and needs of an investor looking for either income or growth. In this article we will cover briefly, growth structured investments.

Growth-oriented structured investments are typically used to achieve consistent market exposure, with embedded protective features that can provide a degree of risk-management in a portfolio. Other times, and still on the growth side of the portfolio, structured investments can be used to try to capitalize on a specific market outlook (bullish or bearish) or to gain efficient, risk-tailored exposure to strategies that may be difficult to access directly. If you are looking to reduce your overall portfolio volatility, these investments are worthy of your attention and examination. Today, as a result of higher interest rates, higher market volatility, and lower markets, we feel the terms of these investments are now more attractive.

Growth investors considering any structured investment should:

  • View structured investments as buy-and-hold strategies whose payouts are not guaranteed until maturity.
  • Understand there is no guaranteed secondary market and that while issuers have historically bought back structured investments, they are under no legal obligation to do so.
  • Be comfortable with the creditworthiness of the issuer since payments made by structured investments are subject to the credit risk of the issuer.

Below we highlight just a “few” hypothetical strategies so that you can see structured investments in action on the growth side of the portfolio. But first, a high-level description of growth-oriented structured investments:

Growth solutions:

  • market participation is the goal, often with some risk mitigation
  • designed for an investor looking to grow their assets, generally characterized by a single payment at maturity
  • tied to the return of an underlier, such as an equity index, a basket of indices or a stock
  • can offer full principal protection, partial protection, or no protection at all

Growth use case #1: international exposure, with a degree of risk management

The objective: An investor seeks the potential growth and diversification that may come with international equity exposure. She is optimistic about emerging markets specifically, and comfortable with equity risk. However, she would appreciate some downside protection should those markets experience a slight to moderate decline.

A potential solution: A market linked growth note with upside participation tied to a broad emerging market equity index along with barrier protection. An example of this type of note can be visualized in this hypothetical illustration:

Underlier: MSCI Emerging Markets Index
Term: 4 years

Benefits:
• leveraged and uncapped participation in any gains in the underlier at maturity
• return of principal, so long as the underlier has not declined below the barrier at maturity

Considerations:
• the potential for losses that are 1:1 from the underlier’s initial level should the underlier close below the barrier level at maturity; losses could be significant
• the underlier’s return is based on price return only and does not include dividends

Growth use case #2: expressing an investment view
The objective: An investor follows the market closely and feels that over the coming 18 months U.S. equity returns may be more muted, or even slightly negative (she expects single-digit returns, either positive or negative). She wants to remain engaged in the markets, but also somewhat protected if market gains do not continue.

A potential solution: A market linked growth note that offers exposure to U.S. equities, with the potential for a return regardless of whether market performance is positive or negative and a degree protection against a market decline. An example of this type of note can be visualized in this hypothetical illustration:

Underlier: S&P 500 Index
Term: 18-months

Benefits:
• upside participation (up to a cap) in any gains in the underlier
• payment even if the underlier return is negative, as long as negative return is not below the hard buffer level at maturity

Considerations:
• the hard buffer only protects principal against a degree of decline in the underlier; losses could be significant
• the underlier’s return is based on price return only and does not include dividends

Informed Investing
Structured investments come in a wide variety with different terms and conditions. There’s one for almost any market outlook or investment goal, giving investors the chance to stay in the market and choose how much protection they need to feel comfortable.

When considering any structured investment, understand the type of protection it offers as well as its pay-out potential by working with a qualified financial professional and carefully reviewing the offering documents before investing.

In summary, there are far too many combinations of investment characteristics, barriers, both hard and 100% guaranteed return of the principal investment, auto-callable features, to be covered in this brief article.

To learn more about how risk-managed and alternative solutions can be used within a diversified portfolio please contact us at john.j.grande@grandefs.com or call 1-800-722-1258. We would be happy to spend time with you on the phone or set up a Zoom meeting call to answer all of your questions about a strategy that has proven so valuable to so many of your colleagues.

John J., John S. and Traudy Grande, CFPs, are owners and Principals of Grande Financial Services,Inc., Oakhurst, New Jersey. The Grandes advise doctors across the country on a diverse range of investment and financial matters. Contact them

questions at john.s.grande@grandefs.com or call800-722-1258. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services, Advisors, Inc. Grande Financial Services, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services. A structured investment typically has two components – a note and a derivative (often an option). Because of the derivative component of the investment, the investment performance may exhibit low correlation to the performance of the underlying asset or index. There are costs and fees associated with structured investments. A derivative is a financial instrument which derives its value/price from the underlying assets. The underlyer is the collection of securities or a representative index used to create the derivative and as it changes in value the derivative will follow suit. Investors should consider any potential tax consequences of owning and disposing of an investment. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.