Principal protected notes: More relevant than ever

Combining safety and performance, principal protected notes (PPNs) offer the best of both worlds for investors, who have good reason to snap up PPNs while interest rates remain relatively high. More on this often-overlooked investment vehicle with Benoît Bélanger, Manager, Structured Product Development and Management at Desjardins.

Why are PPNs particularly attractive in the current environment?

In the wake of the 2022 rate hikes, fixed income investments have seen a resurgence in popularity, offering investors compelling returns while safeguarding their principal. To date, investors have focused primarily on guaranteed investment certificates (GICs). With the rate-cut cycle underway, investors may want to consider principal protected notes to enhance potential returns.

Principal protected notes include both a fixed income component that safeguards invested principal and an option strategy offering exposure to equity markets with varying degrees of participation. Now is an ideal time to embrace this opportunity, with interest rates trending downward and expected to continue. This will adversely affect bond yields, and perhaps in turn, PPN characteristics.

In a few words, how would you explain the advantages of PPNs to a client?

PPNs offer the potential for higher returns linked to equities with the peace of mind of bonds, as you’re guaranteed to receive your principal at maturity even when market returns are negative. Our message to clients is as follows: your investments are exposed to market performance, yet you’re protected, as in the worst-case scenario, if market returns are negative, you get your invested principal back.

What’s the role of PPNs in an investment portfolio?

Diversification is their forte. On the one hand, guaranteed principal protection helps stabilize their portfolio in a downside market scenario. And on the other, a solution that incorporates a range of option strategies generates different results from direct market exposure. In addition, the underlying securities can be chosen specifically to complement other portfolio components.

Can you give a few examples?

Think of an investor approaching retirement who wants to continue growing their portfolio to boost their savings but who cannot afford to lose their principal. For them, principal protected notes are ideal.

Retirees can also come out ahead, earning income to support their lifestyle without jeopardizing their remaining nest egg. This can involve returns through periodic coupon payments or multiple PPNs with staggered maturities.

How do I choose the right principal protected note?

Structured products can quickly become complex, and we strive to avoid this pitfall as manufacturers. At Desjardins, simplicity is what drives our philosophy to avoid unpleasant surprises. Nevertheless, advisors should take the time to thoroughly understand the calculation formula of each note and the market underlying that generates its potential return.

After that, everything depends on the investor’s needs and preferences. Do they want contingent or guaranteed income? Coupon payouts or a growth model? Exposure to a specific market? The beauty of these products is that they’re customizable.

Why choose Desjardins?

We’ve developed a quarter century of expertise in structured product development and management, which has been acknowledged by multiple industry awards. Desjardins was named Best House, Capital Protection in Americas for the second year in a row, and Best House, Canada for the fifth year in a row, at the Structured Retail Products Americas Awards gala organized by the UK-based firm Structured Retail Products (SRP).

This longstanding experience gives us the necessary perspective to design products that are both simple and powerful to meet investors’ goals.

Principal protected notes may not be suitable for all investors. Important information is contained in the information statement and oral disclosure document for each principal protected note. Documents regarding note issues are provided on the summary page for each issue. Before purchasing investments, investors should read these documents carefully and discuss the investment’s suitability with their investment advisor or dealer representative. The notes can only be purchased in the Canadian jurisdictions where they are legally distributed, and only from people who are registered and authorized to sell them. Investments in these notes carry certain risks. Returns on notes are determined by the change in value of the underlying assets over the course of the term. There may be no return payable to the investor. Returns cannot be determined before maturity and past performance is not indicative of future returns. Some notes may be subject to caps, participation rates or other limits affecting returns. For principal protected notes, the full principal amount is only repaid at maturity.

Principal protected notes are not considered insured deposits under Quebec’s Deposit Institutions and Deposit Protection Act, the Canada Deposit Insurance Corporation Act, or any other deposit insurance plan.

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