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CNBC
7 days ago
- Business
- CNBC
Look to this strategy for tax-advantaged returns and downside mitigation, UBS says
With the S & P 500 up marginally in 2025 and bonds seeing sharp price swings, structured notes could give investors a combination of returns and downside protection – if used carefully. Structured notes are hybrid assets: They combine a debt instrument with derivatives, and they're tied to the performance of another asset, like a stock or an index. These notes can also offer investors some measure of protection to mitigate downside in this underlying asset. Investors who purchase these investments are expected to hold them up until their maturity date to capture their full benefit. These notes come in different flavors. For instance, some generate income , while others offer some level of principal protection in the form of a buffer. The notes are primarily in the wheelhouse of sophisticated and high-net-worth investors due to their complexity. "People want both the downside protection and the income," said Ashton Lawrence, certified financial planner and senior wealth advisor at Mariner Wealth Advisors in Greenville, South Carolina. He has used income notes to complement clients' fixed income sleeve. "Each one will have different characteristics that will make it advantageous in a fixed income allocation." UBS recently highlighted a certain structured note strategy that aims to combine downside protection and the prospect of gains at a favorable tax rate. Step-down trigger autocallable notes as diversifiers The firm called out step-down trigger autocallable notes, or SD-TANs, in a May 19 report that touted their ability to complement a portfolio that holds stocks and bonds. "Historically, SD-TANs have exhibited a low correlation to other asset classes, attractive returns, and a very low probability of losses," said Daniel Scansaroli, head of portfolio strategy and UBS Wealth Way Solutions, chief investment office, Americas, at UBS. "While they have been unlikely to outperform direct stock investments, they have historically outperformed bonds, especially on an after-tax basis, in most market environments," he added. In UBS's example, the firm discusses a note that's linked to the S & P 500 and the EuroStoxx 50 indexes, with a maturity of five years and an autocall return – or the return paid when the underlying asset reaches a certain level and is called back by the issuer – of 8.5%. If the two indexes are above their starting level after 12 months, then the note is called, resulting in a return of principal plus 8.5%, according to UBS. The longer the notes are outstanding, the greater the return. The note in UBS's example also has a 25% step-down trigger downside protection: If the indexes are down 25% or less at maturity, the principal and the 8.5% annualized call return. If either index is off more than 25%, the investor gets the principal less the decline of the worst performing index, the firm said. Tax considerations There's a tax planning component at work, too. These step-down trigger autocallable notes can fit in a taxable account. Unlike bond interest, which can be subject to ordinary income tax rates as high as 37% – or 40.8% if accounting for the net investment income tax – returns from these notes are treated as long-term capital gains, the firm said. That means they'd face a top tax rate of 20%, or 23.8% when including the net investment income tax. There are lots of catches for investors to be aware of, however. For starters, these notes are complicated, and investors need to be comfortable with tying up their money until maturity. The income they pay isn't the same as what investors would get from bonds, either, UBS said. While bonds pay interest on a semiannual basis, these step-down autocallable notes are likely to be called back in 12 to 15 months – and that's when investors pick up their returns, the firm noted. That's something to bear in mind for investors who have time-sensitive cash flow needs they need to meet. "When considering the amount and type of structured investments to add to your portfolio, assess your objectives, risk tolerance (including issuer and underlying asset risk), and liquidity needs, as secondary markets are limited," Scansaroli of UBS said.
Mint
21-05-2025
- Business
- Mint
Where the richest families are shifting their investments
Wealthy families are focusing more on publicly traded investments in developed markets—over less liquid alternative markets, such as private equity—while keeping an eye on the near-term consequences of a global trade war. Nonetheless, a first-quarter survey by UBS Global Wealth Management of 317 family offices managing $1.1 billion each, on average, reveals some of the richest families in the world believe their strategic investment strategies are working. They are unlikely to make big asset allocation adjustments in the next few years. Despite leaning toward public markets, 'these family offices are highly allocated to alternatives," Daniel Scansaroli, head of portfolio strategy in UBS's CIO Americas office, notes in an interview. That has allowed them to capture the extra returns typically available in riskier private markets 'for the better part of a decade," Scansaroli says. In 2024, family offices globally boosted their stock allocations in developed markets to an average of 26% of their portfolios, up from 24% in 2023. U.S. investors had 30% of their portfolio allocated to developed market stocks last year. Of all families surveyed, 35%, on average, plan to increase their stockholdings further to a 29% allocation next year. Globally, the family offices UBS surveyed allocate 56% of their assets to traditional asset classes and 44% to alternatives. U.S.-based families, however, have far more in alternative investments—54%—with only 46% in traditional assets. In five years, however, the mix could shift, as about a third of those surveyed expect to boost their private equity holdings in both direct investments and funds at that time, UBS said. In both public and private markets, families appear to be boosting their investments in sectors that offer 'greater exposure to long-term growth trends, yields and diversification," according to the wealth manager's sixth annual Global Family Office report. The long-term growth trends are in emerging technologies within healthcare, pharmaceuticals, electrification, generative artificial intelligence, and the transition to cleaner sources of energy. Though some families have 'clear investment strategies," in these competitive fields, most are on a 'steep learning curve," according to the report. 'It's apparent that family offices generally are in the early stages of understanding how to invest in the space." UBS conducted the survey from Jan. 22 to April 4, largely before President Donald Trump's so-called liberation day announcement on April 2 of steep tariffs on goods imported from countries across the globe roiled stock markets. Still, 70% of families interviewed cited a global trade war as the top investment risk of the year, although those surveyed didn't view trade as a long-term risk. Instead, their long-term concerns rest on rising debt in the U.S. and 'how that could contribute to a long-term recession," Scansaroli says. According to the survey, 53% of families view a global recession as a risk in the next five years and 50% expect there will be a debt crisis in the next five years. Another risk on family's minds? A major geopolitical conflict. More than half of families surveyed (52%) cited this as a risk for 2025, while 61% see it as a risk in five years. One way families are accounting for risk is by boosting yield-generating assets. Although their allocations to private credit remain relatively small—at 4% in 2024—that is up from 2% each year of UBS's survey from 2021-23. Surveyed families making changes to their portfolios this year expect to up their private credit allocation to 5% to ensure their portfolio generates enough income, Scansaroli says. Yields on private credit—which generally are floating rate—are now between 9% and 12%, he says. Moving to private markets allows investors to get 'away from the incredible market volatility that we've seen in the rate space," Scansaroli says. Bond yields have been whipsawed by Trump's tariff policies. Moody's decision on Friday to downgrade the top-tier triple-A rating on U.S. government debt—becoming the last credit-ratings firm to do so—briefly pushed the yield on 30-year Treasury bonds to just above 5% on Monday. Yields rise when prices fall. A striking detail in the report reveals U.S. family offices allocated 86% of their investments in North America—up from 74% in 2020—a figure that represents a larger home bias than demonstrated in any other nation, UBS said. North America is broadly popular, however, with 53% of all families allocating assets to the region, largely because of the growth of U.S. tech stocks. Whether that home bias will change near terms because of U.S. economic policies remains a question. 'A lot of U.S. families brought their cash back to the U.S. as it was seen as a high growth region, while some non-U.S. families invested here for safety reasons, with the growth of corporate earnings and depth of capital markets," an anonymous U.S. family office client said in an interview with UBS. 'But the tree has been shaken in the last few months and investors are busy trying to figure out what the world will look like next week, next year, next decade. Things are very fluid and I think there'll be a reversal." Write to Abby Schultz at
