Perfect timing for Principal Protected Notes (PPNs)?

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Desjardins highlights the rise of Principal Protected Notes, a unique opportunity to combine full principal protection at maturity with attractive upside potential

PRINCIPAL PROTECTED NOTES (PPNs) provide access to investment solutions that are different from traditional fixed-income investments. While they guarantee the principal at maturity, like GICs, they also use an embedded option strategy that targets upside potential in global equities and other opportunities. This blend of principal protection at maturity and the prospect of additional returns makes PPNs an increasingly attractive investment solution for investors. “Investors gain exposure to the stock markets while sheltering their initial investment,” said James Neals, national director, structured products at Desjardins Group. “Although PPNs are an investment solution whose merits have been less well-known in the Canadian market, they have steadily gained traction as advisors reach beyond traditional asset classes to

Desjardins Group is the largest cooperative financial group in North America and the fifth-largest cooperative financial group in the world, with assets of $408 billion. It was named among the 2022 Canada's Top 100 Employers by Mediacorp. To meet the diverse needs of its members and clients, Desjardins offers a full range of products and services to individuals and businesses through its extensive distribution network, online platforms, and subsidiaries across Canada. Ranked among the world’s strongest banks according to The Banker magazine, Desjardins has one of the highest capital ratios and credit ratings in the industry.

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DESJARDINS PRINCIPAL PROTECTED NOTES (PPNs): ATTRACTIVE INVESTMENTS FOR YOUR CLIENTS

SECURITY

“Although high interest rates are widely expected to fade, they have helped PPNs alleviate a dilemma that had been troubling investors: striking a balance between safety and attractive returns”

James Neals, national director, structured products at Desjardins Group

Speaking with Wealth Professional in a recent interview, Neals said, “There’s an unprecedented opportunity in the PPN market today, derived from a confluence of factors.” Higher interest rates are generating new opportunities in fixed income, while carefully structured option strategies provide exposure to potential growth in equities. “Although high interest rates are widely expected to fade, they have helped PPNs alleviate a dilemma that had been troubling investors: striking a balance between safety and attractive returns,” Neals said. “Today, PPN investors can have their cake and eat it, too.” “Furthermore, when targeting the upside potential of global equities, the current environment is a good place to start, as it offers an interesting entry point, increasing the likelihood of attractive returns at the end of a note’s term,” Neals added. Finally, inflation remains a major concern for many investors. While traditional term investments struggle to offer rates that outpace inflation levels, the compound benefits of a higher interest rate environment and a more favourable global market outlook allow PPNs to offer potentially more attractive returns than GICs.

Desjardins’ long history as a cooperative with close ties to its members and clients provides the firm with a unique perspective on investors’ goals and challenges. “We build our programs from the ground up,” Neals said. “Embedding ourselves with the advisor and end client, we design solutions tailored to their needs.” Neals mentioned that the ability to create a product with an optimal blend of benefits within a given set of circumstances is helping PPNs become an increasingly significant part of Canadian investors’ portfolios. PPNs are designed for investors at all life stages who have less appetite to assume

risk in their portfolios and who seek a safe and potentially more attractive alternative than the traditional term investments. For example, people dependent on retirement income who want to protect and potentially increase the value of their assets may benefit from these solutions. They can also use PPNs to combine different maturities to match their cash flow needs. At the other end of the spectrum, younger clients who are focused on wealth accumulation could benefit from the versatility of PPNs to diversify the sources of return in their portfolios and reduce some of the noise around market fluctuations. A PPN, said Neals, is a flexible investment that is ideally suited for today’s market. “They’re designed for anyone who is looking for security, potential growth, diversification, and flexibility.”

client-focused approach are all key to long-term success in structured products.”

Desjardins has been a forerunner and key player in the Canadian structured products space for over 25 years, and now owns more than one-quarter of Canada’s structured product market (a category that includes PPNs). Desjardins’ success has been recognized consistently by the industry as well. At the SRP Americas 2022 Awards, the UK-based research firm Structured Retail Products named Desjardins “Best House, Canada” for the third year in a row.

Coins under umbrellas. Principal protected notes

Perfect timing

Unlocking the benefits

Published 15 May 2023

“A PPN is designed for anyone who is looking for security, potential growth, diversification, and flexibility”

James Neals, national director, structured products at Desjardins Group

GROWTH

DIVERSIFICATION

ACCESSIBILITY & FLEXIBILITY

WHY CHOOSE DESJARDINS?

Owns more than 25% of the Canadian

structured product market

25 years of expertise

in structured products

Stability recognized

by rating agencies

Partner of the world's largest

investment banks and credit unions

11-year

winning streak

meet their clients’ needs in an increasingly complex and uncertain market environment.”

PPNs have two key parts wrapped in a single solution that aims to deliver multiple benefits. The fixed-income component is relatively straightforward. It ensures the repayment of the invested principal at maturity. The second component, the use of options in the hunt for further upside in global equities, is more sophisticated. Being constructed with a set of assets in their own right, and with a variety of features, the notes can sometimes be perceived as difficult to grasp. While PPNs come with a variety of features, Neals said Desjardins is committed to offering simple and transparent solutions tailored to the goals of the investor. He emphasizes that an experienced partner is crucial to maximizing the benefits of PPNs while resolving any complexity. “As a trader in various asset classes over my career, I'm acutely aware of the need for trust among the product manufacturer, advisor, and investor. Experience, scale, credibility, and having a

Who should invest in PPNs?

Desjardins

Legal note An investment in principal protected notes (PPNs) may not be suitable for all investors. Important information about principal protected notes is contained in the Information Statement and the Oral Disclosure Document of each note. Investors are strongly encouraged to carefully read this documentation related to a note issuance before investing and to discuss the suitability of an investment in the notes with their investment advisors or dealer representatives before making a decision. The documentation related to a notes issuance in particular is available on the summary page of that issuance. In the event of any inconsistencies or conflicts between this document and the Information Statement, the Information Statement governs. The offering and sale of notes may be prohibited or restricted by laws in certain jurisdictions in Canada, and notes are not offered for sale outside Canada. Notes may only be purchased in the jurisdictions where they may be lawfully offered for sale, and only through individuals duly registered and authorized to sell them. Past performance is not indicative of future performance. The return on principal protected notes is dependent on the change (which may be positive or negative) in the value of the underlying assets during the term of the note, and it is possible that there may be no interest payable to the investor. The return on a note cannot be established before maturity. Some notes may be subject to caps, participation rates, and other limits that feed through to performance. The full principal amount of a principal protected note will be repaid at maturity only. An investment in notes is subject to certain risk factors. Please read the Information Statement and Oral Disclosure Document for complete details, including the precise formula for determining the return on a note. The PPNs will not constitute deposits that are insured under the Deposit Institutions and Deposit Protection Act (Québec), the Canada Deposit Insurance Corporation Act, or any other deposit insurance regime. Structured Retail Products (SRP), a division of Euromoney Global Limited, is a research firm founded in 2001 in England, providing news, data, research, and event and training services related to structured products. SRP provides manufacturer and distributor awards. On the manufacturer side, the manufacturers with both more than 10 striking products and more than 10 maturing products during the March 1, 2021 to March 31, 2022 period present in the SRP database were in contention to win one of the manufacturer awards, the contenders with the top ratings winning the awards. For the Best House awards, ratings are calculated by taking each contender’s results with the following weighting: annual sales as in SRP’s database in the year to the end of March 2022 with a 50 percent weighting; and survey score with a 50 percent weighting, the survey score being based on the average rating across various criteria given to each contender by the survey respondents. Desjardins received the “Best House, Canada” award. All rights reserved.

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INVESTOR ECONOMICS. « Retail Brokerage and Distribution Report – Canada » Strategic Insight : SI Research, Spring 2022. August 2022. (Consulté le 29 novembre 2022)