BNP Structured Note Explained by CIO Shaun Krom.

We recently added the BNP Paribas Fixed Coupons Protected Growth 3 Structured Product on the platform. We let our Chief Investment Officer (CIO), Shaun Krom do his analysis and explain why this could be worth considering for your investment portfolio. Below are his thoughts:

Economics

This note pays you a guaranteed coupon at the end of the first year of 20% on a quarter of your investment and returns a quarter of your capital at that time.

You then receive a guaranteed 50% coupon at the end of the third year on a quarter of your investment and are returned a quarter of your capital at that time.
At the end of year 6, you are guaranteed to be returned your remaining capital plus 500% of the return of the underlying index on that capital.

The index gives you a broad exposure to global equity, commodity and bond markets. The index is rebalanced frequently by BNP Paribas using their proprietary algorithm that optimises the weights to achieve the highest expected return while keeping volatility within a 5% range.

What sort of investor might consider this note, and why

This note is suitable for an investor with a lower risk appetite who wants to guarantee their capital but still wants market participation. This is suitable for an investor who can invest for a longer time frame.

This note might be suitable for an investor who, due to their risk appetite, might invest some of their capital in the market and leave the rest in cash or fixed income. For example, an investor might invest 80% of their money in equities and leave the remaining in cash or invest that in the bond market.

This note guarantees an investor's capital and provides a guaranteed income to invest in years 1 and 3 while still allowing exposure to global risk markets with leverage. In such a case, an investor might consider investing the low-risk component of his portfolio, 20% of his assets in the above, into such a structure.

One of the benefits of this product, compared to other such notes, is that an investor gets back part of his capital and a return prior to the 6 year expiry of the note. Many structured products are for a fixed 6-year period, and if an investor sells that investment prior to its expiry then the full economic benefit of the note is not realised.

This note pays back 20% of the investors' capital in year 1 plus a guaranteed 20% return on that capital at that time. An investor could then use that money to invest back into the market if they so choose. This happens again in year 3, albeit this time with a 50% guaranteed coupon on the 25% of capital.
So, in effect, even though this is a 6-year note, half your capital is returned by year 3 with a guaranteed coupon for an investor to deploy again as they wish.

Lastly, this note is suitable for an investor who wants to be invested in a broad range of global assets, equities, commodities, and bonds and would like a professional to optimise this for them. BNP trades this index frequently to optimise the risk/return outcome of the index. Below is a breakdown of the index holding as provided by BNP Paribas. You can see that in low-risk environments, the index might have more than 100% exposure to equities, bonds and fixed income and at other times when the market is drawing down, it can have less than 100% exposure.
The investor gains 500% exposure to this index managed by BNP, so if the index is up 50%, for example, the investor will get a 250% return on the remaining capital plus his guaranteed capital back.

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