There are some that believe that investors can make money if the market is rising and money if the market is falling, but not in a volatile sideways market. We beg to differ…

Product providers are always developing new products for the market conditions we seem to be facing and Alpha Structured Investments’ Results Series and the UBS Perles & Goals Series are prime examples of investments suited to the volatile and sideways moving markets we have been experiencing this last year.

Last year provided opportunity for a fixed return as high as 17.5%pa

These products typically provide investors with a high level of fixed income over a set period of 1 or 2 years, regardless of market movement, and the benefit of conditional capital protection*. With returns last year fixed as high as 17.5%pa, the returns are not to be sniffed at.

* Conditional capital protection

The main risk associated with these products lies in the conditional protection. Both offer a dollar back for every dollar invested, provided none of the reference shares fall by more than 40% over the term of the investment (Alpha Results) or 30% at maturity (UBS Perles & UBS Goals). Should a reference share breach the barrier, then the value of the capital at maturity becomes linked to the lowest performing share.

For example, consider Alpha Results with is typically links the conditional protection to 5 blue chip shares: If the worst performing share falls by more than 40% then rises to 95% of starting value, $1 invested would return $0.95 (in addition to the fixed income received).

It should also be noted that if all 5 of the blue chips had fallen by 30% but none had breached the barrier, a dollar is still returned for every dollar invested.

Why is volatility a good thing for these products?

Volatility is one way of measuring uncertainty or the risk of the reference shares falling in value. The higher the volatility, the higher the premium that can be commanded on the income, and having just come out of the GFC, volatility has been at historically high levels.

The view among many investors is that we are still sitting at much lower levels than before the GFC and that the downside is relatively limited, a fall of more than 40% on a blue chip seems an unlikely event. Indeed of the 38 Series issued by Alpha since 2007, to date, none have breached the 40% barrier but it remains a risk investors would do well to understand.

Current volatility has dropped significantly and income levels now offered (Alpha Results – Series 9) are in the region of 14.75%pa, still a considerable premium over term deposit rates and an attractive proposition for those that feel investment markets are likely to track sideways over the next 18 months.

Our view is that investors would do well to take advantage if we see a spike in volatility again. We consider this as part of an investors overall allocation towards equities.