Australian equity markets have performed very well over the last few years, with market capitalisation growing by around 11 per cent per year over the last 10 years. This may, however, leave you wondering where markets are heading and whether Australia can keep up its current pace. So rather than seeking out opportunities in growth stocks, you may find yourself switching to financial products that can generate income.

The problem with a low interest rate environment is that it is hard to generate a reasonable income stream with one year term deposits paying 5 per cent or less.  To generate more income you would have to significantly increase your risk appetite (increased risk = increased return).  Or would you?

Structured investment products are opening new doors for investors looking for both capital protection and income.  The term ‘structured investment products’ may initially cause investors to turn around and run, but all it really means is that these products are tailored or packaged to meet the individual financial goals of investors.

If you share the following financial goals for your investment portfolio or Self Managed Superannuation Fund, read on to get more information on two new structured investment products:

• You seek higher yields than those generally available from cash investments;
• You seek capital growth from exposure to international equity markets;
• You want the confidence of capital protection on expiry (after 6 years); and
• You are looking for the benefits of an ASX listed investment for maximum flexibility and price transparency.

New opportunities in structured investment products
Two products that have recently been added to the growing family of structured investments include Macquarie Bank’s ALPS product and Citigroup’s YIELDS product.

The main attraction of these products is that they focus on generating a steady stream of income (via yield) and, in the case of YIELDS, achieve some capital growth. At the same time ALPS and YIELDS provide you with the benefit of protecting your capital if you hold each product until the maturity date.

A well-known strategy to generate income on a regular basis is writing call options over shares you own. Citigroup‘s YIELDS use this underlying strategy to:

• Achieve a target performance of 12% per annum and;
• Offer you the potential for capital growth from the exposure to a portfolio of 30 of the world’s largest companies (selected from the Dow Jones Global Titans 50 Index).

Macquarie’s ALPS product takes a different approach. They offer:

• A maximum starting yield of 13.2% per annum, paid semi-annually
• A portfolio that is directly linked to the performance of a basket of 64 Australian companies is selected from the ASX/S&P 200 based on market capitalisation.

The yield remains at the starting level of 13.2% per annum unless a knock-out event occurs. A knock-out event occurs if any one of the companies within the basket falls in value by more than 50% over the term. In this case, the yield will reduce by one-sixth (or 1.1% per half year) for the remainder of the investment term.

These products share similar risks including general market factors such as the performance of each underlying stock, interest rates and exchange rates. As is always prudent with all financial investments, you should consider the Product Disclosure Statement carefully before making any investment decisions.

More information on Structured Investment Products can be found on the ASX website.

© All rights reserved 2004. This material is educational and it is not intended to constitute financial advice.

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