English 421: Technical Writing

I apologize for getting this on the website so late, my laptop crapped out (internet driver) again, and I’ve been spending all day trying to diagnose and fix the problem. Since I do not have internet access (besides the one minute I borrowed this computer) I’ve typed up the article and have attached it.

 

To begin, this “article,” if you would call it, was in the special advertising section in the Wall Street Journal.   Hence, the first assumption is a bias on the part of the writer, who claims to be “an independent financial journalist,” but is writing what can be considered in some aspects as a white paper for a company. It seems a bit shady, but has elements of a white paper, and is fairly convincing in its argument. It would be easy for a ready to miss the “Special Advertising Section” label, and they would feel as if they are just reading another article. Regardless, the article presents some important lessons for our white papers.   

 

The article is centered around “structured investment products,” and the reader is immediately hooked in with an opening question; “Never heard of structured investment products? If so, you’re not alone.” Almost instantaneously the writer attains affinity with the reader, because they are now worried. Given the current financial crises, many people are certainly looking for ways to capitalize on investments, especially if the newer, better solution is just around the corner. Gratned, the graphic provided (I again apologize for not having the image scanned), provides what appears to be a balanced look at the types of structured investments, their characteristics, their pros, and their cons. The author ensures that she focuses on giving back round about minimal returns on investments, and proceeds to offer reasons why the newer investment packages are indeed good solutions. An important way that she keeps the readers reading is a sprinkling of large dollar figures throughout. If people see the amount of money that is at stake in the economy, and the rewards that the reader can reap really keep you interested. 

 

The author analyzes the advantages and disadvantages of the structured investment programs, and makes her case as to why investors should seek this option. This clearly parallels a white paper, and essentially any persuasive document, in its structure. Although she does make a great argument, it’s important to note the context (biases). 

 

Oops, I forgot to attach the article, I’ll have to just paste for now. Sorry everyone.

 

Structured Investment Products

Tools to Help Manage Volatility, Protect Portfolios

 

Never heard of structured investment products? If so, you’re not alone. Despite their growing global presence they may be the best kept investment secret. They can take advantage of upward market trends as well as falling or lackluster markets and reduce volatility. 

Taking their cue from the highly successful European market, structured products were originally introduced in the U.S. several years ago. Since then, they’ve caught on with retail, institutional and corporate investors as well as mutual fund managers who invest to gain exposure to a remote sector or market.

“They are not exclusively for ultra high-net-worth or high-net-worth investors,” said Chris Warren, managing director, head of structured products Americas at DWS Investments, the U.S. asset management arm of Deutsche Bank. “We’re seeing inetrest from the mass affluent, especially Baby Boomers near or at reitmrent as structured products can reduce risk and portfolio vitality.” There is one caveat, Warren said. “as with any investment, most structured products offer a risk/return trade off, so there’s no free lunch.”

Eksportfinans ASA, the specialist export lending firm in Olso, Norway, which sells structured products in Europe and Asia, has seen an increase in sales in its U.S. structured products, which debuted in 2004. Year-to-date 2008, the firm has sold $2.8 billion in structured products, up from $2.1 billion in 2007.

“This year has seen a significant flight to quality and we’ve been the beneficiary of that,” said Martine Mills Hagen, senior vice president, head of funding. Investors have turned to issuers with high credit ratings such as Exportfinans with a AAA rating. The firm has also carved out a niche by providing smaller structured products with no minimums and structuring investments with a variety of maturities. “We have to provide investors with the structures they want,” she added.

Whether or not they are on your radar screen yet, structured investment products are worthy of a closer look, especially with the equity and fixed-income markets – and invest portfolios – suffering some of their worst losses ever. While not all investments achieve their objective, if properly employed, structured products can potentially limit losses, protect capital, reduce portfolio volatility and offer enhanced returns. Structured investments are worth understanding as a means of ensuring asset allocation and managing portfolio risk.

“Structured products can provide diversification in a challenging market environment,” said Keith Styrcula, chairman and founder of the Structured Product Association. “There’s a new generation of investment products that can take volatility out of a portfolio and add enhancements that you can’t get simply by asset allocation alone.” According to the Association, U.S. sales of structured products were $114 billion in 2007.

“The argument for structured products has gotten more persuasive because of the market craziness,” said Tony Proctor, CFP, president and founder of Proctor Financial, the money management firm in Wellesy, MA who believes in combining a variety of different structured investments for clients, including 100 percent principal protected ntoes. “The real dilemma is how to keep clients participating in the market and prevent them from running and hiding.

 

What Structured Products Are, and What They Are Not

The term “structured products” (or more accurately, structured investments) is a broad classification of investments including notes, ban CDs, trust units, exchange traded funds (ETFs), close-end funds and newer innovations like exchange traded notes.

The category also includes financially engineered investment products, each with a unique set of characteristics, pricing, risk/reward profile, possible returns, benefits and limitations. Each is designed to potentially meet an objective or appeal to investors having a certain directional view of rates, sectors or markets.

Most structured investments are hybrid securities that have some equity, some fixed-income characteristics. Each is typically composed of one or more derivatives and fixed-income securities that provide indirect exposure linked to an underlying single equity, equity or type of index, market basket, sector such as commodities, currency(ies), or a broad indicator of interest rates or inflation. Mutual funds and ETFs can also be underlyings. Some structured investments pay regular coupons while others don’t.

            There are several standard types of structured products. Some use leverage to enhance upside returns and may or may not cap the upside. Absolute return notes, for example, pay returns if the underlying goes up or down but doesn’t trade outside of a specified range. Buffered return enhanced notes provide downside protection if the underlying doesn’t breach a preset barrier, while reverse convertible securities pay handsome coupons and the performance upside of a stock, but if the stock breaches a downside price, will convert into that stock’s shares. There are also partial of fully principal-protected notes, which guarantee that some or all of an investor’s principal will be returned at maturity even if the underlying performs poorly. Each works a bit differently and issuers often use their own, branded product acronyms. 

            Similarly included are FDIC-insured, bank-issued certificates of deposit(CDs) whose rate of return is not fixed, but whose performance will fluctuate because return is linked to an underlying asset, such as the S&P 500 Index. These have become extremely popular in recent times, as they guarantee the return of full principal at maturity even if the underlying falls in value. They are also backed by the FDIC, who recently but temporarily raised protection from $100,000, which protects investors from losses if a bank/CD issuer falls.

            “Structured products sound exotic but they’re not,” said Dean Erickson, president of Erickson Capital, a wealth management firm in Los Angeles, CA. who has been using FDIC-insured CDs for a few years. “I like them because you can get close to market returns on a variety of indexes but don’t have to experience the downside risk that so many investors have experienced.”

            Structured investments, however, are not are structured credit products, mortgage-or student loan-backed securities, debt-laden off-balance sheet structured investment vehicles or other toxic credit financings that caused the credit markets to seize up. In a case of mistaken identity, structured investment products have been erroneously lumped into the structured credit products catch-all bucket. 

 

Don’t Skip the Detail: Risks

            Most U.S. structured investment products are registered with the U.S. Securities and Exchange Commission and disclose fees and commissions, potential risks and hypothetical payouts via individual term sheets and in more generalized prospectuses.

            Depending on the specific products, maturities may be as short as 30 days or as long as several years. Some structured products are registered with and trade via a stock exchange, while others are simply offered privately to investors. Structured products are designed to be held to maturity. But in some instances, structured investments can be redeemed before maturity with a price/return sacrifice. 

            Issuers of structured products are large investment banks or affiliated firms based in the U.S. or around the world. Issuers may craft a structured investment that it believes would appeal to many investors, then sell these so-called “off-the-shelf” investments through large, regional or independent broker/dealers, and/or financial planners. An issuer may also customize a single structured product tailored to a specific investor’s needs. 

            One important aspect with structured investments is to understand the credit risk in the product, i.e., the risk that an issuer may not be able to honor its obligation to repay investors in the future is a risk inherent in many structured products. That’s what happened in September when Lehman Brothers filed for bankruptcy, leaving investors worldwide holding Lehman-issued structured investments. Investors, with their financial advisors, will want to check the credit ratings of issuers and mitigate risk by investing across different creditworthy issuers. 

 

Lori Pizzani is an independent financial journalist based in Brewster, NY