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The Power of Income Notes in an Investment Portfolio

anthony palmer HighRes BlackWhiteFor me as head of Carrick Wealth’s Investment Strategy, it is really satisfying when a key building block in our portfolio construction performs as planned during a market selloff.

This building block is called an income note which is a subset of the broader category of structured notes. Historically used by ultra-high-net-worth individuals and family offices, Carrick introduced this asset class to our clients over 5 years ago and will continue to use income notes into the foreseeable future.

The first quarter of 2020 was horrific for markets with the Dow Jones down 26.23%, Euro Stoxx 50 down 28.97%, FTSE 100 down 28.2%, Nikkei down 24.67% and Oil down 47.23%. Over this same quarter Carrick had 49 income notes pay their respective coupons (interest), which ranged from 5% to 9.1% and which played their role perfectly of minimizing the effect of the broader selloff and dampening volatility.

As we know, the purpose of diversification is that when one investment goes down, or is not doing well, you are insulated from the result because of the others you have in place. Spreading your assets among investment types, styles, and markets is one of the few time-tested strategies for investors with long-term financial goals. Income notes introduce downside protection and stability into a portfolio, especially in light of the volatile markets we are currently experiencing and reasonably expect to continue seeing.

The Carrick Investment Committee ensures that our income notes are positioned to work in tandem with actively managed global funds and exchange traded funds (ETF’s). We believe that this blended approach achieves the best risk-return payoff profile for our clients across various market conditions.


So, what actually is an income note?

An income note is a promise issued by a large international bank to make regular payments as long as certain conditions are met.

What are these conditions?

At Carrick we use income notes that are linked to developed market indices whereby quarterly, semi-annual or annual coupons are paid if the individual reference indices haven’t individually dropped by more than a certain percentage. As an example, an income note could be linked to the US, UK, European and Japanese stock markets and as long as no index has dropped by more than 30%, then the coupon is paid.

A really positive feature is called a memory coupon which means that if a coupon is missed because one or more of the underlying indices has breached the coupon barrier, it can be caught up on a future observation date as long as all the indices are back within their respective barriers. This memory feature has proved to be an attractive risk mitigation tool. As an example, although we had 49 notes pay a coupon in the first quarter of the year, we did also have 6 notes miss their respective coupons. However, these notes stand a high probability of their coupons being caught up as the markets start to recover.

What is the risk of losing capital?

Capital can be lost if, on maturity, any underlying index has individually dropped below a certain percentage. For example, the vast majority of our notes have a capital barrier of 60%, meaning you would only lose capital if any index has dropped by more than 40% at maturity. Even in the eye of the storm, only one of our notes had breached its capital barrier and as of the date of this article, this note is back within its capital barrier. Since the initiation of our note programme 5.5 years ago we have had no notes that lost capital.

Capital can also be lost if the issuer goes bankrupt. That is why we only use large international banks with credit ratings of A or higher. Examples of issuers include, but are not limited to, UBS, Goldman Sachs, Investec and Credit Suisse which are all strong and highly rated issuers.

How long is the investment?

Income notes are generally 5-to-6-year investments, although there is a secondary market for them should you wish to sell out of a note.


The key structured note considerations which the Carrick Investment Committee focuses on, are:

  • Credit quality of the issuing bank
  • Only using developed market reference indices
  • Using deep coupon barriers with a memory coupon
  • Using deep capital barriers
  • 16 years of back testing

With the current environment of historically low interest rates, income notes can also be seen as playing the role, alongside bonds, of producing yield for portfolios and providing levels of downside protection. We at Carrick believe that income notes are, and will continue to be, an essential core holding in our portfolios.


Anthony Palmer CA(SA) is Head of Investment Strategy at Carrick Wealth and is a qualified chartered accountant with substantial experience in the financial hubs of London and Wall Street.

Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning and integrated wealth management solutions. Carrick is also licensed in Zimbabwe and Malawi and holds three global licences in Mauritius.

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