e art of using structured products in a balanced portfolio May 3, 2012

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1 e art of using structured products in a balanced portfolio May 3, 2012 Samson Koo, Managing Director Structured Products FOR BROKER/DEALER ONLY.

2 RETURN Using Structured Products in Portfolio Construction Can provide creative portfolio solutions beyond traditional management strategies LEVERAGE ENHANCED YIELD/INCOME PRINCIPAL PROTECTION RISK 2

3 Using Structured Products in Portfolio Construction What is your strategy? Simple Asset Allocation: Stocks, Bonds and Cash Core Satellite Strategy: Separating alpha and beta investment returns 3

4 Using Structured Products in Portfolio Construction Developing A Portfolio Construction Framework With Structured Products Help construct the initial Core Portfolio with traditional planning tools (Mutual Funds, Exchange Traded Fund s etc.) Then replace or complement traditional tools with Core Structured Solutions to help protect principal and/or reduce risk profile. Construct the Satellite Portfolio by tilting toward specific investment themes. Identify and Implement Satellite Structured Solutions to hedge or monetize a particular market view. 4

5 Constructing the Core Portfolio Step 1 Create a target allocation Step 2 Analyze allocation 5

6 Constructing the Core Portfolio Step 3 Build The Core Portfolio with Strategic Asset Allocation: Use traditional Investments in line with Strategic Asset Allocation across sectors Example: Index Funds, Sector Funds & ETF s Then optimize the core portfolio through Tactical Asset Allocation with Structured Products The goal is to improve the risk/return profile Use income and/or growth structures as a replacement or complement to traditional investments Utilize index, and equity linked products across global and/or sector themes Balanced Portfolio 45% Stocks S&P 500, MSCI EAFE, Russell % Bonds Corps, munis, ladders 10% Alternatives REITS, precious metals, currencies, energy 6

7 Constructing the Core Portfolio Product Types for the Core Portfolio Reverse Convertible Notes (RCN s) Index Linked Certificates of Deposit (CD s) Index Linked Notes Steepeners, Non-Inversions and Range Accrual Notes Interest Rate Products 7

8 Constructing the Satellite Portfolio Step 4 rank your best current ideas Top 5 ideas to be able to manage 8

9 Constructing the Satellite Portfolio Satellite Investments and Their Correlation To Large Cap Equities 9

10 Constructing the Satellite Portfolio Step 5 Implement by reducing Core allocation Balanced Portfolio 45% Stocks S&P 500, MSCI EAFE, Russell 2000 Satellite emerging markets, individual stocks, leveraged notes 45% Bonds Corps, munis, ladders Satellite rate deals, autocallables 10% Alternatives REITS, precious metals Satellite Currencies, energy 10

11 Constructing the Satellite Portfolio Product Types for the Satellite Portfolio Enhanced Yield and Leverage Products Accelerated Return Notes AMPS and Supertrack Notes Currency linked products 11

12 Constructing the Satellite Portfolio Step 6 Measure and rebalance Core Bigger trends and themes longer term rebalancing Satellite More focused approach Shorter term rebalancing 12

13 Using Core/Satellite in Portfolio Construction Total Portfolio Current Income Short Term Medium Term Long Term 13

14 Conclusion Structured products are an indispensible part of modern wealth management Creative, tailored investment solutions Provide either narrow or broad based exposure Principal protected structures are designed to help reduce the portfolio risk profile 14

15 Disclaimer Structured products are NOT suitable for all investors and are sold only by prospectus. Investors should carefully read the prospectus and pricing supplement prior to investing which contains a detailed explanation of the risks, tax treatment, and other relevant information about investment. Additionally, investors should consult their accounting, legal or tax advisors before investing. Structured products are sold through financial professionals. This information is prepared solely for informational purposes and should not be considered an offer to sell or solicitation to buy any security. Structured Products typically pay an interest or coupon rate substantially above the prevailing market rate. Structured products also frequently cap or limit the upside participation in the reference asset, particularly if some principal protection is offered or if the security pays an above-market rate of interest. Attendant risks may include loss of principal and the possibility that at expiration the investor will own the reference asset at a depressed price. Other factors that may affect the investment value of the structured product include: interest rates, volatility of the underlying asset, liquidity and time remaining until maturity. While structured products pay interest similar to debt securities, they often exhibit very different profit and loss potential. The profit and loss potential of many structured products is more akin to an option contract, particularly those where principal invested is at risk from market movements in the underlying security. Structured investments are generally backed by the issuing firm. Typically, the issuer of the structured investment maintains a secondary market; however, they are not obligated to do so. This report is provided for information purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service. Unless otherwise stated, all information and opinion contained in this publication were produced by Advisors Asset Management, Inc. (AAM) and other sources believed by AAM to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. All AAM employees, including research associates, receive compensation that is based in part upon the overall performance of the firm. AAM may make a market in or have other financial interests in any security or sector discussed in this report. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Past performance does not guarantee future performance. 15

16 FOR BROKER/DEALER ONLY. Thank you