Monday, December 31, 2007

Make use of structured notes for your strategic capital and portfolio!

What are structured notes?

A structured note is a form of security or deposit instrument issued by a variety of issuers. These notes can be fixed or variable-income instruments. Structured notes can also offer a rate of return linked to the performance of some other financial benchmark, such as the value of an equity index, the direction of U.S. interest rates, or the price of a commodity.

In part due to the use of options, fixed-income structured notes typically offer a higher potential rate of return than current market rates. They have proved popular with investors looking to maximise returns in today’s low-interest-rate environment. In addition, equity-linked notes are popular with clients who want to invest in an equity market, but retain a level of capital protection.

How do they work?

Suppose that you buy a structured note linked to the Standard & Poor’s 500 Index when it stands at 1,200. For every year the index stays above, say, 1,300, the note will pay 4.5%, a rate of return higher than the prevalent interest rate. If the index does not stay above 1,300, then you will receive no return.

In many cases, a structured note offers protection for an investor’s capital by guaranteeing to pay back the original investment when the note matures. Still, they are considered to be riskier than conventional fixed-income investments because there is a greater potential for investors to receive no return.

Who are they suitable for?

There is a wide variety of structured notes available. They range from conservative fixed-income or equity-linked investments that have their principal protected, to more aggressive equity-linked or fixed-income-linked notes that pay a rate of return based on the performance of an equity index, a basket of shares, an individual commodity such as silver or gold, or the direction of a rate index. In some cases, a structured note will be created to meet the needs of an individual client.
The suitability of an individual structured note depends on the investor’s financial circumstances and tolerance for risk, so it’s important for investment advisors to fully understand the objectives of their client.

What role can a structured note play in an investor’s portfolio?

It depends on how the note is created. In our example, where the structured note is linked to the performance of the S&P 500, the note allows the investor to diversify into equities with principal protection. The investor gains exposure to the potential returns offered by equities, while protecting his or her initial investment.
Structured notes can be customised to fit your unique situation, and serve as a hedge to reduce overall investment risk.

For example, let’s say you own a distribution company and ship most of your items over land. Your financial situation depends a great deal on the price of oil. You could purchase a structured note with a rate of return that is linked to the price of oil.

If the price of oil rises, the structured note pays a higher return, which can help offset the negative effect that higher fuel prices would have on your trucking business.

What are the potential risks?

Because they can be customised, structured notes also tend to be less liquid than conventional fixed-income investments. Though they can be traded on some equity markets, there may not be an active trading market in them before their maturity date.

A structured note offers some participation in other markets, but the exposure may be limited, which also means the potential upside may not be as great as it would be if you invested directly in the market, although this depends on the path the index takes to maturity. If you are considering this type of investment, you need to keep in mind that different types of notes are subject to different regulations depending on the country you live in.

Thursday, December 27, 2007

Leveraging, or using borrowed funds to increase your invested capital, has the potential to significantly increase returns. But there are risks, as we

Life and circumstances are always changing. No matter how sound your financial plan was when it was created, revisiting it periodically will help ensure that it meets your current needs.

Schedule an annual review

An annual review is an opportunity to revisit your strategy and make sure that your plans are still on track. You can take stock of how your investments have performed over the past 12 months, and make any necessary adjustments if there have been any significant changes in:

Your personal circumstances
. Changes in your life situation, such as getting married, pursuing a career opportunity in a different country, or receiving an inheritance, can have a huge impact on your financial strategy.

Your objectives. The mere passing of time can change your investment outlook. For example, if you are within 10 years of retiring, you may be less able to tolerate the risk of a capital loss. You might decide to increase the conservative investments — such as fixed-income securities — that you hold.

Your financial situation. If you’ve recently finished paying off a major expense, such as a property or business, it can have a substantial effect on your cash flow. During your annual review, you can revisit your current cash flow needs, allocating any increase to meet your long-term investment objectives.

Your estate plan. Ask yourself if your estate plan still meets your needs. For example, does your will need to be updated to take into account children or grandchildren or additional assets you have acquired since your last review?

Your immediate future. You can also look forward to the coming year, helping to plan suitable strategies to deal with anticipated events, such as a marriage, birth of a child, or move to another country.

Tuesday, December 18, 2007

Using your Strategic Capital in partner with leverage for an optimal portfolio

Leveraging, or using borrowed funds to increase your invested capital, has the potential to significantly increase returns. But there are risks, as well. This type of strategy works and when it might be suitable for the sophisticated investor.

How does leveraging work?

Suppose you have a portfolio of equities and fixed-income securities worth US$1 million that earns a rate of return of 4.5% annually, or about $45,000. Using these assets as collateral, you might borrow, say, $600,000 to invest in additional bonds and equities. If you continue to make 4.5%, your overall portfolio will then earn $1.6 million X 4.5% = $72,000 annually.

Obviously, there is an increased cost, because of the interest payments on the loan. But depending on the size and term of the loan, the interest you pay may be relatively low. In this example, if it’s 3.0%, then your annual interest costs on the $600,000 loan would be about $18,000. You’d still make $54,000 in a year, for an annual return of 5.4% on the $1-million you have invested.

Does leveraging have any other uses?

You can also use leveraging to increase the diversification of your portfolio without selling your current holdings. For example, if you have a portfolio of primarily fixed income-based investments, you can leverage it to invest in equities. Similarly, if you wish to expose your portfolio to the potential returns in foreign markets, you can do so by investing the borrowed amount in foreign securities.

Leveraging can also help you adjust your asset mix as your investment objectives change over time. For example, if you are approaching retirement and want to preserve more of your capital, you may consider leveraging your equity portfolio to add more fixed-income securities rather than selling your equities and possibly incurring tax consequences.


What risks are involved?

Along with higher potential gains, leveraging carries the risk of magnifying potential losses. If the value of your portfolio drops, not only do you lose the rate of return, but you may be issued with a margin call. This occurs when the value of your securities falls below the minimum collateral required by the lender. You’ll have to make up the difference by supplying additional cash or securities to your account or sell some of your securities, possibly at a loss.


For what kind of investor is leveraging most suitable?

Leveraging typically appeals to sophisticated investors who are concerned with preserving their wealth while also seeking potentially higher returns. But they need to understand the way leveraging works and must be aware that the increased potential rewards are accompanied by greater potential risks.

Wednesday, December 12, 2007

Strategic capital and portfolios partnering the world of private equity

What is a private equity fund?

A private equity fund is a pool of capital invested in companies that are not typically publicly traded. The investors in a private equity fund agree to make contributions of capital over a specified time period. The manager of the fund calls on the investors’ commitment as the funds are needed.

There are a number of strategies that private equity funds use. They may be involved in leveraged buyouts or management buyouts of existing, mature companies. They may provide venture capital financing to start-up companies, or to companies that have not yet had an initial public offering. They may provide mezzanine or subordinated debt financing, either when the owners of a company want to limit dilution of ownership, or when a company is in financial difficulty.

Individual private equity funds sometimes focus on a specific industry, such as life sciences, but often broaden their scope to several industry specialisations. Generally, they require a minimum investor commitment of US$5 million to US$10 million.

What are the benefits and pitfalls of private equity funds?

Private equity funds have historically provided a greater return on investment than investments in public companies. In addition, returns are not highly correlated to the stock market, so they provide useful diversification.While returns are not guaranteed, the 20-year average is currently about 14% to 15% per year. In the early years, however, an investment return is likely to appear negative while cash contributions are made to the private companies before they achieve measurable results.

The main drawback is the length of commitment. Investors who choose a private equity fund should be prepared for a commitment of 10 to 12 years. The commitment is irrevocable: there is no organised secondary market for private equity funds and there are no withdrawal windows.

What type of investor should consider private equity funds? Private equity funds are suitable for patient investors who understand the investment’s long-term nature and who can afford to let their capital develop over a few years without seeing any initial return on investment. Whether it is an appropriate investment depends on the individual investor’s tolerance for risk and level of investable assets.

One of the best ways to reduce investment risk in this category is through a “fund of funds” approach. A fund of private equity funds invests in 10 or more private equity funds in different industries, creating a more diversified portfolio. In addition, it provides the investor with professional fund management, including access to investment data that may be unavailable to individual investors. It is also a more affordable way to properly diversify an investment in private equity funds.

What role should private equity funds play in an investor’s portfolio?

Investors should always focus on their overall investment goals and should consider how a private equity fund will interact with the other investments in their portfolio. It’s important to recognise that an investment in private equity funds will be the longest-term portion of an investment portfolio.Private equity funds typically represent 5% to 10% of a wealthy investor’