The impact of structured investment products with fixed-income characteristics on the performance of fixed-income portfolios

Abstract

Structured investment products are a relatively new concept in the financial world given that they only gained popularity in the early 1990s. In this regard, this research is still in its infancy and of particular interest to researchers in the field. The literature reviewed showed that particular attention is given to the field of portfolio management and the role which structured investment products play when included in the asset allocation structure of portfolios. Consequently, the study aims to build on previous studies carried out in this area and seeks to assess the impact which structured investment products with fixed-income characteristics have on fixed-income portfolios. The study was conducted over a twenty-one year period between 1 January 1994 and 31 December 2014 whereby given the nature of the data required for backtesting, a quantitative analysis was sought. This analysis led to the creation of three traditional portfolios mainly invested in bonds with a small portion also allocated to equities for which indices were used as proxies. Furthermore, another nine portfolios similar to the traditional ones were created each of which included one of the structured products constructed. In total, three types of structured products were created, each having a one year maturity. Thus twenty-one products from each structured product category were created and launched into the nine portfolios on an annual basis. Subsequently, the performance of each of the twelve portfolios was estimated by building and ultimately comparing the efficient frontier for each portfolio. In addition, several performance ratios namely the Sharpe Ratio, the Treynor Measure and the Jensen Measure were also calculated to allow for a more comprehensive analysis. The study revealed that portfolios including the participation product tend to outperform the traditional portfolios as opposed to the yield enhancement product which did not generate a favourable outcome. The portfolios including the capital guaranteed product on the other hand had stable to positive results when compared to the traditional portfolios. On a final note, the model constructed makes it possible to be applied in a real-world context whereby the performance of actual portfolios can be tested through the model to ultimately determine whether structured products tend to improve the performance of both fixed-income and equity portfolios.