Whether Index-based or Equity-based Notes, many investors love the Memory feature – it pays out missed Coupons in the next successful Observation. This helps to maximize profits despite market downturns, and it certainly is something other investment vehicles cannot offer.
What we tend to forget is that a Note with Memory is NOT always better than a Note without. Whether Memory feature or no, each structure should be tailor-made to suit the investor’s preferences. Kind of like building your own sandwich at Subway (extra bacon and cheese, little or no vegetables please).
Price of a Memory Feature
Introducing the Snowball Memory feature into your Index-based product comes at a price. Let’s look at a Note with only 3x Indices that are Australia, Euro Stoxx 50, and Japan:
Without Memory (Note A), the Returns PA are 10.13%. Slapping on the Memory feature brings the returns down by 2.5 percentage points to 7.66% PA (Note B). Below is what each Coupon looks like.
3 Coupons from Note A would give roughly the same profits as 4 Coupons from Note B.
If a market downturn occurs in the last lap of the investment, there would not be enough time for market recovery and a next successful Observation. In a case like this, since each blue Coupon is larger, Note A without Memory would have made more profits than Note B.
When to Use Memory
Ah, the most exciting and important part of this short article. The sweet glutinous core of happiness in jelly-filled doughnuts. Generally speaking, there are two ideal scenarios to add a Memory feature to your structured product:
- For the experienced investor
- For the ultra safe investor
For everyone else in between, there are definitely circumstances when a Memory feature would help with what they’re looking for as well. The feature is not strictly limited to individuals from the two groups.
For the experienced investor
These investors have been making profits from their structured product investments and are familiar with how it works. They also watch the markets, and have their own opinions on how the sectors and individual companies are performing.
For investors (or Financial Advisers) in this group, they have the knowledge to make more accurate predictions of future performance. As such, they are able to settle for a higher Coupon Trigger – say 80% instead of 60% – because they believe that the Underlyings would not fall more than 20%. A higher Coupon Trigger gives much better returns, and here is where there is room for the Memory Feature.
For the ultra safe investor
Most people in this group would be semi-retired or approaching retirement soon. They would settle for lower returns, and would like as much capital protection as possible.
Other than flooring the Protection Barrier, the Coupon Trigger can be decreased (as low as 60% for an equity-based Note), with a Memory feature added for good measure. Again, this does NOT mean that all Coupons will be received – it instead helps to maximize chances of receiving all Coupons. For such amounts of safety, the tradeoff will be the reduced Returns PA on the product.
The Memory feature is indeed useful, and an especially attractive feature. To really take advantage of the flexibility of structured products however, investors should always consider the tradeoff for a Memory feature. Will adding a Memory feature create an investment that’s most in-line with what I am looking for?
On top of dealing with a full-time job, it may get tedious for retail investors to navigate through all the financial jargon and keep up with market changes. For any queries, please do not hesitate to contact your Financial Adviser, or drop us a line at firstname.lastname@example.org.