Section 0.4

What structured products are not

7–9 min

The message that runs through the entire course

Mini-quiz · 5 questions

Essential question

A portfolio is allocated by asset class: equities, bonds, real estate… Where does a "structured product" go? The answer is surprising: nowhere, because it is not an asset class in its own right.

Discovery The idea to dismantle

Structured products are often spoken of as if they formed an investment category in their own right, alongside equities, bonds or cash. A structured product is not an asset class: it is a contractual structure that takes an existing underlying (a stock, an index, a rate, credit, etc.) and transforms its gain and risk profile. The label "structured product" describes the packaging, never the contents.

Concrete consequence: two products bearing the same label can have opposite profiles — one as cautious as a bond, the other as exposed as a stock. The deciding reflex is the look-through: looking through the wrapper, to the underlying and the issuer. That is what this section installs.

Before the visualization, think it through

"I would like to put 20% of my portfolio into structured products"

A client makes this request. Before even discussing a product, what is wrong with the sentence itself? What do you need to ask them for it to make sense?

X-raying the product

Here are three products that all bear the label "structured product". Click on each one to open the product and see what you are really exposed to. The goal: to observe that the same label covers a bond, a stock and credit. Proportions are illustrative orders of magnitude.

What you are really exposed to

Asset classBonds

90%

90% · Zero-coupon bond from the issuer

10% · Call option on the SMI

The "capital guarantee" is first and foremost a loan to the issuer: here, over 5 years and at current Swiss franc rate levels, nearly 90% of the notional funds its zero-coupon bond. This proportion is not fixed: it depends directly on the product's horizon and the currency's rate level (the longer the maturity and the higher the rates, the cheaper the zero-coupon bond, and the more is left for the option). Its deep nature remains bond-like: in portfolio management, this line must be included in the bond pocket, not in a "structured" pocket nor with equities. Its natural benchmark is, moreover, a bond from the same issuer with the same horizon.

The hidden common denominator: issuer risk. All three are above all commitments of an issuer. The grey band marks where this risk appears explicitly in the decomposition, but it does not stop there: if the issuer defaults, it is not only that portion that is lost, it is the entirety of the product, because the promise of the formula can then no longer be honored either. It is the only risk that every structured product shares, whatever its underlying and its structure.

The mental model

Always three questions: the risk profile, the underlying, the issuer

Faced with any structured product, you always break it down along the same three axes. Reading the product means answering these three questions in order, never stopping at the commercial name.

The risk profile

The product's pay-off: what the structure does (protect, cap, boost, convert a decline into a gain). It is a transformation, not an asset class.

The underlying

The asset actually at stake: a stock, an index, a rate, a currency, credit. On its own, though, it does not determine the asset class: it is the pay-off, or the pay-off combined with the underlying, that sets it.

The issuer

The bank that commits to paying. Its credit risk is always present.

Four misconceptions to correct

The allocation trap

Where do these products belong in the portfolio?

Start again from the three products, and their real asset class

The three products X-rayed above. Seen through its risk profile (its pay-off, sometimes combined with the underlying), each one attaches to a very real asset class. What unites them is the “structured” label, never their risk.

Barrier Reverse Convertible on Roche Coupon against downside risk on the share12%Equities

100% capital guarantee on the SMI Mostly a loan to the issuer (zero-coupon)7%Fixed income

Credit Linked Note on a basket of companies Default risk of reference entities6%Credit

The allocation as it reads on the statement

Here is how this portfolio appears if structured products are treated as an asset class in their own right.

Asset classWeight

Equities40%

Bonds25%

Structured products25%

Cash5%

Commodities5%

Five tidy lines. But “structured products” is not an asset class: until this 25% pocket is assigned, there is no way of knowing which risks the portfolio is really exposed to.

Your turn: reclassify the three products

Take the three positions in the “structured” pocket and attach each one to its real asset class. Credit being a bond-type risk, you will find it grouped with fixed income at the next step.

Case studyDeclaring the real exposure

A portfolio manager must present to their risk committee the real exposure of three lines held, classified by underlying asset class (look-through), and not by their commercial name. For each one, indicate the asset class to which it should be assigned.

To which real asset class should each of these lines be assigned?

Barrier Reverse Convertible on Roche · 12%

100% capital guarantee on the SMI · 7%

Credit Linked Note on a basket of companies · 6%

Compare the two allocations

Validate step 3 to reveal the portfolio's real exposure.

Key message

A structured product is not an asset class: it is a contractual structure that transforms the exposure to an underlying. To classify it, look through (look-through) to the underlying, how the product works, and the issuer. The same underlying can in fact lead to opposite profiles depending on the structure: it is the combination of the two that sets the real asset class, equities or bonds, with credit itself belonging to bonds.

This reflex has a practical consequence in portfolio management: to measure a portfolio's risk, you never assign a structured product to a "structured products" pocket. You reallocate it to its real asset class. What matters is the true exposure, so that the portfolio's allocation correctly reflects its risk.

In short: asking for "a structured product" means nothing in itself, because it designates no specific risk. What makes sense is to start from the need and the underlying: which objective, which benchmark, for which expected outcomes.Section 0.3 · Why these products exist

Mini-quiz · Section 0.4

5 diagnostic questions

~5 min · instant feedback

Question 1 / 5

A client tells you: "add some structured products as a new asset class, to diversify." What is the best rephrasing?

Question 2 / 5

A 100% capital-protected note on the SMI over 5 years: which real asset class does its risk resemble most?

Question 3 / 5

Two lines bear the label "structured product": a 100% capital-protected note and a Barrier Reverse Convertible on a single stock. Which statement is true?

Question 4 / 5

Why is a structured product not an investment fund?

Question 5 / 5

A statement shows "Equities 45% · Bonds 25% · Structured products 30%". How useful is this presentation for measuring risk?

0 / 5 answers

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